Scalable Capital and Brexit


A month and a half is either a very long or a very short time for investors, depending on whether they trade every day or buy every now and then and then go to sleep for 10 years. And how well Scalable Capital’s algos work, we will only know after a longer phase of ups and downs. But the chosen Brexit with its price slumps is a good opportunity to see how the RoboAdvisor has coped with it.

I had already sent Twitter kudos to the creators of Scalable Capital on the Friday after the election for updating the data in the interface several times a day and not just displaying the data of the previous day as usual. Transparency creates trust, because of course you want to know what the algo is doing with this situation now. And indeed, the day after the referendum, it didn’t go down quite so low for me, to be precise, it didn’t go down at all, it went up. If I compare my portfolio with the Dax, the Dax was €9890 on “my first day” (on which all investments were bought by the Algo), today it is currently at €9,500, yesterday it closed at €9268, and yesterday it has to be compared with yesterday’s minus. On the other hand, in the Scalable Capital interface, I have a “second-weighted return” of 1.39% and a “simple return” of 1.37%. Of course, the comparison is somewhat unfair, after all, the alternative would not be a pure DAX portfolio, but the Dow Jones and the Euro Stoxx have also developed downwards. But in general, the Algo has won here.

But how exactly did he do it? So the statement in last week’s mail:

Our dynamic risk management had already shifted client portfolios to more conservative investments in recent months, significantly mitigating the impact of today’s price slumps. In particular, the positioning currently focused on government and corporate bonds is contributing to stabilisation.

What the mail does not mention is what signals have led to a redeployment. But that will probably remain a secret, just like the Coca Cola formula.

By the way, if you sign up for Scalable Capital via this link, you and I will get a small bonus 🙂

Comments (since February 2020 the comment function has been removed from my blog):

Christoph says

  1. August 2016 at 23:55 Hallo Tom,

I’m also a customer of SC and wanted to look on the Internet to see what other users report

Regarding your search for a “fairer” benchmark, SC itself uses a mixture of MSCI World (more precisely the iShares Core MSCI World ETF) and Euro overnight money (per 1-day EONIA rate). Everything is in the terms and conditions of the contract, sections C 4 to 6 https://de.scalable.capital/app/api/pdf/static?type=scalable_terms_and_conditions. )

These two investments now represent the benchmark in different weighting ratios, depending on the portfolio VaR level, with which they (at least themselves) compare the performance of their active asset allocation strategy. Since the overnight interest rate has been, let’s say, “negligible” for a long time, you can easily calculate the return of the benchmark in your head by simply looking at the percentage-weighted performance of the MSCI World (applicable to your respective VaR level).

But of course, this benchmark is not necessarily the most “suitable” yet. Since SC’s equity portfolio can also include emerging markets, the MSCI ACWI is more suitable as an index, just as (since the SC portfolio can also include a significant proportion of bonds) something like the Barclays Euro Aggregate Bond Index (or Global Aggregate, as American bonds are also represented) provides a better basis for comparison instead of Euro overnight money.

As far as the “secret formulas of the algo” are concerned, well, they will certainly not be able to publish the complete source code directly, but in the whitepaper ( https://de.scalable.capital/wp-content/static/Whitepaper_ScalableCapital_DE.pdf ) from chapter 4 onwards you can get a little deeper insights into the theoretical background of the models they use. However, it also assumes something that you can do something with the terms used, but for less mathematically inclined observers this will probably only remain a black box that you either have to trust or not.

My tip, if you have special technical questions, just write an email to the company. I had done the same a few months ago and got prompt and profound answers from the managing directors. At some point, if the provider should become too big that the boss no longer takes care of you personally, there will only be the standard forms from the service hotline, so try sooner rather than later

Regarding asset allocation, in fact, there wasn’t much more reallocation just before Brexit, so it’s not as if they had “foreseen” anything in particular, but they were actually mainly invested in bonds all the time before that, because since mid-2015 the stock markets have been in a more volatile sideways/downward phase. That alone is not an art – anyone can build a static bond-heavy allocation to limit equity volatility in the desired ratio. The trick is rather to shift back into stocks in a relatively timely manner later in good phases in order to take the return. Only in the long term, i.e. viewed over several market cycles, will it really be possible to say what added value SC can contribute. Their claim is not to bring you the “highest” return ever (it would also be quite dubious to be able to claim something like that), but simply the best possible one that can be achieved taking into account your desired loss limit. So this may mean that your SC portfolio lags behind pure equity investment in stock market booms, or is inevitably the case because their raison d’être lies primarily in downside protection (and only then in upside participation). You should know or understand this beforehand in order not to be mistakenly “disappointed”, because it’s not about the fact that if the stock market rises by +20%, Scalable Capital will give you +40% additional returns above or so – but rather that if the stock market falls by -40%, you will only lose -20% of it with Scalable instead (or even less, depending on your level).

Best regards, and let’s both wish that everything works like this in the long term -Christoph