From time to time, I get readers and Redditors asking me about my thoughts on investing in Syfe’s portfolio.
I have some opinions about it but like a lot of the stuff, it takes too much effort to explain to people.
So I would just tell them: Make sure you know what you are getting yourself into.
If you hear me say something like that it means:
- It is too tiresome to explain.
- I got a feeling you do not know what you are getting yourself into.
- This is not such a good idea.
Then, this afternoon, Syfe let me know they will be transiting my ARI (Risk parity portfolio) and sunsetting it.
So I decided to spend my Saturday sharing some of my thoughts about this sunsetting exercise and what I thought about their operation from my vantage point.
The Transition from Global ARI to a Comparable Syfe Core Portfolio
In the letter to clients, Syfe provided the following reasons why they are transitioning us from the Global ARI portfolio to Syfe Core portfolio:
They communicated that
- Actually, their portfolio risk managed the Covid drop very well. While the general market fell a lot, their ARI 15% Downside Risk dropped only 10.1%.
- The reason they are moving to Syfe Core is that many of their clients communicated that they are more inclined towards dollar-cost averaging and investing for the long term. The Global ARI strategy is more useful if you invest in a lump sum.
In the section below, Syfe explains why we should be shifted over to the Syfe Core portfolio:
The differences between the Global ARI and the Syfe Core implementation:
- ARI is more focused on risk management while Syfe Core focuses on maximising risk-adjusted returns.
- ARI is more exposed to the US market.
- Syfe Core is more Smart Beta and they consider the following factors: Growth, value, volatility and country exposure.
- Syfe Core is more globally diversified.
With that, let me go through some of the areas that I am not comfortable with.
A Risk Parity Strategy Should be Able to Deliver Good Long Term Risk-Adjusted Return to Build Your Wealth
You know what, I find it really hard to believe that investors don’t want a low volatile, decent return fund.
Most human beings are risk-averse and all of us have to find ways to come to grips with handling drawdowns.
So if you have a solution that has a lower drawdown yet is able to capture decent returns to help me build wealth, then I am all for it!
The Global ARI is supposed to be Syfe’s implementation of their risk parity strategy.
In a risk-parity strategy, you invest in different asset classes or financial instruments. Each of these instruments has its own returns and volatility profile.
If you structure them well, the volatility cancels each other out, creating an overall smoother volatility experience.
In the short run, some instruments will do well, and others not do so well. However, if the long term expected returns of all the components is positive, the returns should be decent.
Returns might be lower than 100% equity but they should be decent.
Syfe Global ARI most aggressive risk portfolio has an annual return of nearly 9% a year. Even their lowest risk 5DR portfolio guides a historical 3% a year.
If well implemented, that would mean I gain a good return while minimizing volatility, which makes the experience livable.
Now, even if I am an accumulator that is dollar-cost averaging in the Global ARI, my returns should be rather decent.
Imagine that I was 25 years old in 1980 and I have 40 years to accumulate my money. I will DCA into a portfolio that has low volatility. Each of my annual $24,000 lives through different return sequences.
But because the volatility is low, if we view the returns every 10 years, the compounded returns of each of my annual $24,000 should be pretty close together.
The best example: Suppose you have a savings account that returns you 9% a year. The savings account has no volatility.
Are you going to say that this savings account cannot help you to compound wealth just because it does not have volatility and you cannot DCA into it.
I am not a proponent of a risk parity strategy.
I think it is a unique investment strategy that may fit certain profiles of people with lower risk tolerance and are able to understand the trade-offs.
Risk parity is made famous by Ray Dalio of Bridgewater who introduced us to the All-Weather Portfolio. This is a portfolio made up of 4 different asset classes with very different volatility and return profiles.
It is not a new strategy and many firms based their business on it.
Recent Returns Have Not Been Favorable for the Global ARI
I hazard a guess but I think the recent for the Global ARI is affecting the client’s confidence in the fund itself.
In the past, I tracked the portfolio performance of certain Robo-advisers (you can read it here):
This chart shows the performance of different portfolios, including the Global ARI from 20th July 2020 to the 4th of July 2021.
The Global ARI, at the highest risk level of 25%, delivered 12%.
But that looks mediocre compared to other aggressive portfolios. The Global ARI have an annual standard deviation of 9.1% during this period while the IWDA, which is the ETF that tracks the MSCI World has a higher standard deviation of 13.8%.
Returns are lower but the Global ARI portfolio is also less volatile.
In a way, this is what I tried to explain, you give up returns for a smoother ride.
A 12% performance in any year is decent but in a year where the MSCI World did 34%, it is a tough pill to swallow. Even if you consider a 60/40 portfolio, such a portfolio would have given 20% during this period.
The important message I wish to convey for this part is: Judging the performance of a portfolio over a 1 year period is stupid.
Some portfolios are just unlucky in that they did not enjoy the best returns sequence. During this period, the value premium showed up and the growth stocks did not do as well. So you can see how well Endowus and MoneyOwl portfolios did.
If we track their return 1 year before, things would look very different.
The thing is, 1 year is a seriously absurd time frame to judge how well a portfolio does.
This actually shows certain fragility in the Robo-advisory model (which I will go into later)
Does the Global ARI have an Investment Implementation Issue?
There are many of these investment strategies out there that are backed by research and academic papers.
However, many of these strategies do not work so well in actual implementation. Often, this is due to high cost, or that the strategy looks good in back-tests, but they did not always work well in different time periods and markets.
Do I have reservations about Syfe’s Global ARI implementation? Yes.
But actually, during this 1 year, their performance did measure up to another of their competition.
There is a Risk Parity ETF listed on the New York Stock Exchange under the ticker RPAR.
RPAR is a US$1.4 billion ETF with a net expense ratio of 0.51%
Over the same period, the RPAR returned 13%.
During the same period, the USD depreciated 1.1% versus the SGD, so if we adjust for the change in currency, the return is 12.86%.
RPAR’s co-CIO came out from Bridgewater Associates, and the implementation is very different from Syfe Global ARI:
While the implementation is different and active, it does show that if your strategy is to weigh based on risk, perhaps your returns will be similar.
Global ARI Could be Unique in Singapore if They Change the Portfolio and Persisted
A risk parity portfolio that is accessible to retail investors is a unique proposition.
Perhaps this is why they decide to kick start Syfe with such a portfolio.
Two years may be too short of a timeframe to assess their performance.
However, what we see here is prevalent in the unit trust space.
A fund debuts with a novel idea.
Due to luck, poor execution or a combination of these two, the fund could not gather enough assets. It can be costly for a fund house to manage a fund without scale.
Eventually, the fund is combined into another fund. The fund basically did not survive.
We can observe that while Syfe is a Robo-adviser, the discretionary portfolios in the robo behave the same way as a unit trust.
But Evoke Aris persisted. They are only running one ETF which is RPAR.
They are rather focused, probably because
- They believe enough in the strategy.
- Able to explain and communicate their value proposition very well to the market.
A fund size of US$1.4 billion is not big in the United States but it does show that there are enough registered investment advisers who understand risk parity and advise their clients to invest in it.
Instead of rolling our money into Syfe Core, why not tweak the ARI to improve the diversification mix so that it becomes more diversify yet still have risk parity characteristics?
I think Syfe can learn a fair bit from both Stashaway and MoneyOwl.
Stashaway’s portfolio has also not done as well this past year. According to their model somewhere after COVID in mid of 2020, they moved into China Internet and larger allocation in Gold. Both have not delivered for the past year, but they stuck with it because their model told them to stick with it.
In fact, Stashaway will be doing their 4th reconstitution in its short life and they will be allocating more to China Internet (which was not doing so well).
They showed a lot of trust in their model.
MoneyOwl’s portfolio did the best but factor investors know that the same portfolio did not do as well prior to Jul 2020.
Yet, they still persist with their portfolio allocation, believing that markets are uncertain, we do not know when the factors will appear and when the factors appear, the allocation allows them to capture the returns.
We won’t get the allocation 100% right. Sometimes better ETFs or funds come along that improves our implementation.
It feels to me that patience is rather underrated here.
Syfe’s Smart Beta Strategy is Very Questionable
If you have doubts about their risk parity implementation, their smart beta implementation may be a bigger head scratch.
Late on, Syfe finally released their Core Defensive, Balanced and Growth portfolio.
They have incorporated certain elements of their risk-weighted strategies in Global ARI and the Smart Beta strategies in their Equity 100 portfolio.
In Equity 100, they introduced the concept of factor investing to their prospects and clients.
The factors that the Equity 100 focus on are:
In the Core portfolios, the factors they said that they will focus on are:
- Country Exposure
Now, I dunno about you, but if you read most of the mainstream factor investing literature the common factors are:
- Quality or Profitability
- Reducing asset growth
- Minimum volatility
- Low volatility
- Term (bonds)
- Credit (bonds)
These are the factors most prevalent fund managers, and ETFs tries to implement because there is enough historical data that shows these factor premiums exist across different time periods and across different markets and asset classes.
Well-read readers may correct me but growth has often not performed well in history due to how unsustainably high growth rates were in the past. This is why value distinctly outperformed growth over various time periods and markets.
Technology is a sector, country exposure is a region.
If you believe in Syfe, they are doing something VERY VERY different from Eugene Fama, Kenneth French, Robert Novy-Marx, Dimensional, Research Affiliates, AQR, Alpha Architect, Rayliant and MSCI.
These are the thought leaders in the factor space.
Syfe further claimed that they can time the factors.
After my last write-up about Syfe, I decide to gain more exposure to factor timing.
The research on factor-timing is mixed. Research affiliates and BlackRock’s Andrew Ang did explain how this can be done via understanding which factors work best under which economic cycle and overweighting and underweighting the factors accordingly.
Factors will also get overvalue and undervalue and you could overweight the stocks of undervalue factors and underweight the stocks of overvalued factors.
If you are a client of Syfe, and if you are interested, this may be something you wish to ask them about. How does factor timing work? Is it a secret sauce of theirs?
If this is not written out there, we can only observe whether Syfe can effectively implement its Smart Beta timing strategy.
If we look using the rearview mirror, we would know that from 28th July 2020 till a month ago, the value stocks did very well.
If Syfe’s factor timing works out well, Equity 100 should be able to get into the value ETF as the factor shows up.
But if you compare Equity 100’s performance versus MoneyOwl, you can see a world of difference.
Both are 100% equity portfolios.
Equity 100 did 24%, MoneyOwl’s Equity Portfolio did 35%.
If you observe their allocation, it remains very blend, tilted towards technology and a different country (I still struggle to see how the region is a factor tilt). Equity100 did a rebalancing during this year, but even the rebalancing did minimal in their switch to value-based ETF.
Summary, I am not sure if we should feel thrilled to switch over to a questionable implementation and execution.
Robo-advisers do little to influence investors to improve their behaviour.
I am going broad-stroke and make this statement.
Global ARI might be a good product, with questionable implementation but I think Syfe failed to convince investors to stick with it.
They have to believe enough in a risk-parity strategy to based their debut on that fund.
But they failed to convince the market.
It goes to show that there are some advantages of Robo-advisers but if the value of an adviser is to help your client stick with an investment through the hard times, then they have possibly failed here.
Syfe may have better luck convincing their higher tier clients in person.
We experienced this first hand ourselves as our client advisers see clients face-to-face. We stand a better chance of untangling pre-conceived or faulty investment notions as we can have a few sessions to explain things clearly to them.
In a way, it goes to show how different Syfe’s approach and Stashaway’s approach is.
Both started with unique portfolio strategies that are not super mainstream. Stashaway was able to stick with solely one portfolio (with different risk levels) while Syfe had to branch out into numerous different portfolios.
Perhaps luck played an important role as Stashaway was able to communicate how well their performance was and Global ARI just looks more disappointing.
Was Their Intention to Gather Asset Fast or are they Serious about Wealth Advisory?
When I was writing my first article on Syfe, I already notice something very peculiar.
Shortly after the debut of Global ARI, they pushed out the Syfe REIT portfolio. Then not long later, Equity100.
If Global ARI is such a strong strategy you believed in, then shouldn’t you spend more time talking about the Global ARI?
StashAway’s Freddy spends all this time talking about what they did with their economic regime model and what they are doing with their portfolio.
Pushing out REIT and Equity100 dilutes the airtime for Global ARI.
It is interesting that after a while all we hear is about the REIT and Equity100 and no one asks what I thought about the Global ARI portfolio.
In a way, REITs were hot in Singapore and then Equity100 was popular because of the growth and tech tilt.
If I piece everything together, it just feels like they are going into whatever is hot.
And now that ARI wasn’t so popular, they replaced it with a set of portfolios with a new name.
If you are serious about creating a financial plan to fulfil the client’s different unique goals, you need some strategic portfolios that are well-thought-out that you can blend and create a comprehensive wealth plan.
In a way, this is the private wealth way of doing things. Designing products first and thinking about planning second.
If you ask me, I don’t feel very good recommending them to my friends who are looking for investments or planning purely based on how I observed them for the past 1.5 years.
I do not know how is their client engagement. For those of you in that higher tier, your considerations are definitely more than just investment management.
You will need to see whether they create portfolios that suit your needs and whether they are able to mould you to be better wealth builders.
So do treat this post as an opinion and do consider other aspects of what Syfe provides.
If you are a client on their core portfolios or equity100, it may be good to find out for yourself:
Greater detail of their Smart Beta strategy.
If you gain clarity there, you can ask clearer questions about why they outperform or underperform. You could also compare them to the more appropriate benchmark.
The problem with these black box strategies is that you do not know whether they are performing well or not.
With the usual Smart Beta strategies, we can easily see if the value factor is doing well, whether these funds that are exposed to the value factor is doing well.
Performance Attribution of the Factors.
You could ask them which factor contributed to the underperformance or outperformance and how these are mapped to the ETFs.
This allows you to know in the future if they perform well or not.
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Monday 2nd of August 2021
Good post and insights. Learned lot from you Kyth. Thanks.
Sunday 1st of August 2021
Yup, quite disappointing in the way that they gave up on their risk managed strategy. They should have better communicated the characteristics of such strategy to customers i.e. it doesn't do well in volatile periods (e.g. 2018) OR strong recovering markets immediately after a big bear market (surprise for some people).
Even in their whitepaper & background writeups, their backtests clearly showed that their risk managed strategy hugely underperformed in 2009, the immediate strong recovery from the GFC. Which is also what happened in the liquidity-fueled recovery of 2020.
They could have reviewed how their strategy was reacting to market movements/macro environment & whether it was too slow or too conservative. If the review showed that the strategy was still sound, then make real efforts to reach out, educate & advise customers.
Knowing retail investors, I'm sure lots of them kept jumping around in response to market movements. A -5% move in a week, and tons of people starting switching from 25% ARI to 5% ARI. Moving to Core won't solve this behavioural problem. When markets keep going up, people rush into 100% Equity or Core Growth. When a correction unfolds, they'll quickly switch into Core Defensive. And then investors will complain how come their portfolios still underperforming.
Not sure if they had pressures from VCs to "do more of what works (or what customers want), & get rid of what doesn't". But how & what advisors do to connect & manage their customers when portfolios aren't doing well is what determines if they are serious in providing advisory work.
Right now, Syfe's main value proposition is mainly the iEdge Reit Leaders portfolio.
For a global allocation portfolio approach, if people were to ask me, I would suggest the other Robos:
Stashaway -- if you still want a "risk management" approach; AutoWealth -- more traditional Boggle-style simple cap-weighted low-cost ETFs, no funky style or factor based algorithms or special indexes; Money Owl or Endowus -- if you want Dimensional funds & believe in value and smaller cap companies (Endowus also provides UTs if you want to include some active funds).
Sunday 1st of August 2021
I think perhaps it is what you said. there is not much magic sauce. something needs to give. what stop the downside recovers the slowest on the upside. I think its the signalling it sonly the last few months that it start ramping up.
But I think perhaps that is how the client will behave.
Sunday 1st of August 2021
I agree. Good critical analysis.