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What Singapore Investors Need To Know About Syfe’s Automated Risk-Managed Investing (ARI) Approach

Start taking notes, as Syfe takes us behind-the-scenes to explain their investment approach, which aims to keep a portfolio at the optimal risk level.


This article was contributed to us by Syfe, an MAS-licensed digital wealth manager.

As you might know, Syfe helps you invest in a globally-diversified and fully risk-managed portfolio with the aim of delivering better risk-adjusted returns – and a greater peace of mind.

Today, we’ll delve deeper into the concept of risk management, which is at the core of Syfe’s proprietary Automated Risk-managed Investing (ARI) investment methodology.

Under ARI, asset allocation is optimised to offer the best possible return for your desired risk level, and the risk in your portfolio is monitored to keep it in line with your risk level. This keeps your portfolio’s risk stable over time to deliver better risk-adjusted returns.

Read Also: Investing With Syfe: 5 Things You Need To Know About Singapore’s Newest Robo-Advisor

Understanding The Science Behind ARI

As the Risk Disclosure statement in every investment document proclaims, past performance is not a guarantee of future results. So, while returns cannot be accurately predicted, risk, as measured by the volatility of returns, can be reliably estimated using past data, as seen from the chart below.

Risk can be estimated using historical data.

In fact, systematic risk – the risk stemming from market expressions due to broad factors such as currency fluctuations, recessions etc. – correlated highly with returns, based on our analysis of historical asset class return and volatility over a 20-year period.

Correlation between systematic risk and returns.

This is why Syfe believes that successful long-term investing is much more about managing risk than chasing returns. ARI is the result of nearly two years of research and development by a team of academics, technologists and former bankers to achieve that through a judicious blend of two leading investment approaches, the Global Market Portfolio and Risk Parity Portfolio.

Read Also: Investment Platforms Singaporeans Can Use To Invest A Fixed Monthly Sum

The Value Of Risk Diversification

The Global Market Portfolio has its roots in Nobel laureate Harry Markowitz’s famous Modern Portfolio Theory and is commonly regarded as a 60% equities and 40% fixed income securities portfolio. But while such a portfolio can be considered diversified from an asset allocation perspective, it is often lacking in terms of risk diversification.

Contrary to popular belief, market capitalisation is not equal to risk allocation. In a 60/40 portfolio, the equities portion would have contributed 98.7% of the risk in the portfolio while fixed income securities would have contributed the remaining 1.3%.This is calculated based on the respective returns of the Vanguard Total Stock Market Index and Vanguard Total Bond Market Index from 1999 to 2018.

In other words, the 60/40 portfolio provides little to no diversification from a risk allocation perspective.

Read Also: Singapore Investors: Is Your Investment Portfolio Exposure At The Right Risk Level?

Market capitalisation is not equal to risk allocation.

Risk Parity thus offers an innovative alternative to traditional asset allocation. Risk Parity portfolios allocate market risk equally across asset classes, delivering true diversification that limits the loss impact of individual securities to the overall portfolio.

Applying a Bayesian weighting technique, we combined the best of the Global Market Portfolio and Risk Parity Portfolio to create Syfe’s ARI investment framework – a methodology that augments efficient portfolio optimisation with effective portfolio risk diversification.

How ARI Works In Practice

All Syfe portfolios are created based on your personal risk profile, investment goals and time horizon. In fact, no two portfolios are the same – new portfolios are created every day for different risk levels.

We start by gaining a better understanding of your risk profile through our risk assessment questionnaire. There are three facets we look at:

Risk Needed: The amount of risk necessary to achieve your investment goal.

Risk Capacity: Your ability to take risk, based on your financial situation and lifestyle.

Risk Tolerance: Your propensity to take risk, i.e. how comfortable you are with risk.

Once the assessment is complete, you will receive your recommended risk level in the form of a percentage. Syfe also uses your risk level to label their different portfolios.

Through a combination of low-cost Exchange Traded Funds (ETFs) diversified across different asset classes, sectors and geographies, ARI then builds for you a portfolio that is optimised to give you the best possible return for your risk level.

Read Also: Why Risk-Adjusted Returns Matter For Your Investment Portfolio

Risk-Based Rebalancing

Thereafter, ARI continuously monitors your portfolio to ensure that it stays aligned to your risk level. It does so by detecting tremors of volatility in the markets (or lack thereof), and rebalancing portfolios accordingly and when required.

During the 2008 Financial Crisis for example, ARI would have picked up early warning signs of a looming market correction by detecting increased market volatility (measured based on the standard deviations of investment returns).

With higher volatility forecasted, ARI would have rebalanced your portfolio allocation and reduced your exposure to higher-risk asset classes at the four points indicated in the figure below.

How ARI would have performed during the 2008 Financial Crisis.

The above graph illustrates how a 15% Downside Risk portfolio would have experienced smaller drawdowns compared to a comparable Morningstar medium risk benchmark. ARI would have re-optimised and rebalanced the portfolio to ensure that portfolio risk stays within its designated 15% risk level to deliver the best possible risk-adjusted return.

Helping You Stay Invested

Unlike common rebalancing methods where a portfolio is rebalanced whenever the target asset allocation goes off-kilter, Syfe implements a risk-based rebalancing strategy for all portfolios. This ensures that portfolios are always optimised to stay within our clients’ designated risk level, helping them stay invested even during bearish markets.

As any investor can tell you, seeing your portfolio awash in a sea of red can be incredibly nerve-wracking. Those losses you see can often lead to hasty investment decisions you may later come to regret. But if you knew your maximum drawdown would be constrained by your chosen risk profile, you would be less likely to panic and sell your investments at the bottom of the market – and turn your paper losses into real losses.

With Syfe’s risk-managed investing approach, you are more likely to keep your money invested for the long term, even during periods of extreme volatility, becauseyou know that your portfolio is correctly structured according to your risk appetite, and monitored round the clock to ensure you’re are always investing in line with their your profile.

Furthermore, Syfe keeps fees as low as possible by investing in the best low-cost ETFs. Investors pay only a 0.65% annual fee for their assets under management (AUM) and unlike traditional investment management, there are no entry or exit fees so your returns are not impacted by high fees.

For a more in-depth understanding of Syfe’s investment methodology, you may download the whitepaper here or join an investing workshops to speak with the Syfe investment team.

Special Promotion By Syfe: As a special offer for DollarsAndSense readers, you can receive bonuses for creating and funding your Syfe account:

$10 bonus for funding your Syfe account (any amount)

$50 bonus for investing more than $10,000 with Syfe

$100 bonus for investing more than $20,000 with Syfe

This bonus will be credited within 7 days after receiving your funds and invested together with your portfolio.To enjoy this promotion, you will need to maintain the portfolio with Syfe for at least 3 months. You can read more details on the promotion here.