When a particular asset reaps significant gains relative to other assets in the portfolio, its market value weight increases above the target allocation.
Without rebalancing, the portfolio is increasingly concentrated in the outperforming asset class hence raising risks.
Our algorithm checks customers’ portfolios daily, and performs rebalancing when allocations deviate from targets by more than our "optimised" bands. This can happen weekly, monthly or quarterly, depending on the markets' volatility and performance.
Returns and risks of each asset class change when the economic environment changes.
For example, between January1982 and December2016, the S&P 500 returned +16.4% year over year (YoY) in "disinflationary growth", -10.3% YoY in a "recession", +8.8% YoY in "inflationary growth" and 2.7% YoY in "Stagflation". To optimise customers' portfolios, StashAway builds portfolios that consist of a mixture of asset classes optimum for a given economic environment. Our investment framework, ERAA (Economic Regime-based Asset Allocation), identifies and signals a change in economic cycle and our technology automatically re-optimises portfolios’ asset allocations.
This change in asset allocation is important because it allows us to manage risk and improve returns in different economic environments. This change is "strategic" (can happen once a year to once every few years) but may be as frequent as 2 to 3 times a year if there are a lot of economic uncertainties.