Scalable Capital Investment Review

By Jordan Stodart | On November 19th, 2016

‘No lock-in, no hidden fees, full transparency.’

If you are new to investing and want the hassle removed from allocating capital, or you want to move away from your traditional IFA, a robo-advisor like Scalable Capital Ltd could be a sensible option for generating wealth in an inherently low-rate environment.

Scalable Capital Product

Scalable Capital’s proprietary technology dynamically allocates each investor’s portfolio based on a quantitative measure of their risk appetite. The technology uses forward-looking projections, based on recent market developments, to measure the level of risk in the ETF products you are invested in, and then reallocates their portfolio according to your risk category. In contrast to traditional wealth managers, Scalable Capital adopts a fluid approach to the weighting of asset classes in its portfolios. This allows investors to capitalise on markets where risk is rewarded, and limit exposure to excess risk in more volatile conditions.

This is an institutional class product using state-of-the-art technology, available to you at a fraction of the cost. But, with all investing comes risk and you must feel comfortable that you have selected a risk category that you feel comfortable with, based on the risk categories Scalable Capital deemed suitable for you. You should be aware that you give Scalable Capital discretion over the portfolio allocation in line with the agreed management guidelines, which ensures that they can act quickly without having to ask for your consent before making allocation changes, but also means that you cannot influence individual trades.

Many investors see this is a benefit, as they want an all-inclusive service, but it is not for DIY-style investors.  Read on to gain an in-depth understanding of Scalable Capital. Maybe this is the investment manager for you?

An institutional class product using state-of-the-art technology, available to retail investors for the first time, at a fraction of the cost.

 

Benefits of a Scalable Capital Investment

Access to product

  • All-in-one service.
  • Digital discretionary manager makes decisions on your behalf.
  • Portfolio details (performance, allocation changes, etc) can be monitored 24/7 via the iOS app (Android is on its way).
    • Traditionally, decisions were (with the exception of discretionary fund management) left in the hands of the customer which can be time consuming and means the investor would need to do their research more frequently.

Lower cost

    • 0.75% p.a Scalable Capital fee + 0.25% p.a ETF fee (avg).
  • Traditionally, a client’s portfolio could be hit with fees ranging from 1-3% p.a AuM annually plus hourly costs for an IFA’s time.

 

Risk management

  • Professional risk measure (Value-at-risk) used to determine the risk in a client’s current portfolio daily and to decide whether a change in the allocation is required.
  • There are 23 risk categories (from 3% VaR to 25% VaR) available; you can select from all or a limited sub-set of those based on the results of the suitability check.
  • Portfolio monitoring and suggested allocation changes are conducted with the help of an algorithm running Mote-Carlo simulations (risk projections) on a daily basis to keep you in line with your selected risk category.
    • Traditionally, a customer may have to monitor their own portfolio or rely on a financial advisor who is not always obliged.

Transparency

  • No hidden fees, no kick backs or commissions.
  • Independent selection of the ETFs.
  • Details on the empirical foundation of the risk methodology can be found on the website and the Scalable whitepaper linked in this review.
  • The full investment universe can be found on the website. The initial portfolio allocation based on your specific risk category is displayed during the sign-up process and the portfolio allocation and real-time performance can be viewed through your secure customer login at all times.
    • Traditionally, wealth managers would receive commissions from trading fees and prior to the Retail Distribution Review there was an inherent distrust of the financial advisor community.

Ease-of-use & time saving

  • Quick, efficient and robust sign-up and investment process where an investor can be risk profiled and view their portfolio through a secure login portal.
  • Traditionally, investors would have to have an active relationship with their financial advisor which could be time consuming.

 

Traditional investment methods may have longevity on their side, but it is the technological advances, such as algorithmic distribution of capital to create wealth, that have seen robo-advisors like Scalable Capital increase in popularity in recent years. The above benefits lend themselves to a first-time investor, keen to commence their investment career or a long time investor unhappy with the charges of traditional wealth management or their lack of a robust, data-driven investment methodology, keen to have no active involvement in the allocation of capital. For first timers or those interested in investing a small amount, you should be conscious that the min. investment is £10,000*.

*Edit: £5,000 min investment changed to £10,000 18/01/17

The above benefits  lend themselves to a first-time investor, keen to commence their investment career, or a long time investor unhappy with the charges of traditional wealth management.

Scalable Capital Investment Process

Scalable Capital’s investment process is built around you, the client, taking both investment goals and individual risk tolerance explicitly into account. Based on your investment profile and a carefully selected, comprehensive universe of index-based investment instruments, Scalable Capital deploys a highly innovative, institutional class product to construct a tailor-made, optimal investment portfolio. The methodology includes forward-looking projections, based on recent market developments. Every individual portfolio is continuously monitored and managed with Scalable’s proprietary risk management technology. Before Scalable Capital, this type of service had been reserved for very wealthy or institutional investors.

The portfolios are continuously monitored and managed with Scalable’s proprietary risk management technology.

Read Scalable Capital’s ‘Investment Process White Paper’.

 

Graphic 1: personal user sign-up process, Scalable Capital Ltd

Sign-up

During the customer sign-up process, you will have an online questionnaire to complete which determines your risk profile and also allocates you to a suitable Exchange Traded Fund (ETF) portfolio. Remember that this is your initial portfolio allocation, which will change over time as the risk in the respective asset classes changes and your allocation needs to be adjusted to stay in line with your risk category. An ETF is a fund that tracks an index of assets, such as equities and bonds, and is the most cost-effective as well as a highly liquid method of investing through robo-advice. Scalable Capital has built another algorithm to help them select the best out of a universe of 1,500 ETFs in the UK, and to make sure they spot a better ETF as soon as it becomes available.

 

The sections and questions included in the questionnaire are as follows:

1. Objectives

  • Building wealth
  • Over how long a period
  • Acceptable loss over a one-year time horizon 

2. Knowledge and Experience

  • Asset class experience
  • Experience with different types of investing (E.G: IFAs, self-directed investing)

3. Financials

  • Regular net income
  • Monthly outgoings
  • Reserves

4. Strategy

  • General Investment Account displayed as an output of the questionnaire

Scalable Capital Investment Strategy

Graphic 2: user Investment Strategy, Scalable Capital Ltd

Calculation methodology

The investment planner uses historical returns of static portfolios comprised of index funds and ETFs that match that with the characteristics of the corresponding investment strategy, as far as possible.

 

Risk category

Your individual investment strategy is based on the risk category which is linked to the risk measure Value-at-Risk (VaR). Scalable Capital’s VaR is defined as an annual loss, which shouldn’t be breached with a probability of 95%. For example, a VaR of 12% means that, with a likelihood of 95%, your portfolio should not lose more than 12% in value. There are 23 different risk categories (from 3% – 25% VaR) you could choose from (or less, depending on the suitability check). This does not strictly mean there are only 23 portfolios. If two clients start on different days in the same VaR category they don’t necessarily have the exact same portfolio, because the existing client will only be moved to the new optimum portfolio if it makes sense in terms of maximising your returns after costs (the bid-ask spread for every trade that impacts a client’s portfolio valuation – the direct trading costs are included in Scalable Capital’s fee). Because each client’s portfolio is optimised on an individual basis there can be small nuances in portfolios with the same VaR category.

In short, you, along-with every other client, will have an individual and continuously optimised portfolio that targets the best risk-adjusted return after costs, in-line with your selected risk category.

You will have an  individual and continuously optimised portfolio that targets the best risk-adjusted return after costs in-line with your selected risk category.

Portfolio allocation

The average weights shown, as displayed in the graphic above, are indicative of a representative portfolio over the last 15 years. The weights shown in your strategy, at the time, are not static but change due to market movements and hence change as necessary adjustments are made in the portfolio in order to target your portfolio’s specific risk level.

 

ETF selection

Scalable Capital aims to select the best and most cost-efficient Exchange Traded Funds to comprise the Scalable investment universe. Here are a couple of criteria examples:

Quantitative

  • How expensive?
    • Total Expense Ratio (TER),i.e, the ratio of the fund’s total cost over its total assets, is a measure of a fund’s overall expenses. Scalable Capital favours low-TER ETFs, to the benefit of investor.

 

  • How liquid?
    • Scalable prefers highly liquid ETFs, which are considered large (in terms of market capitalisation) and established (in terms of issuance date) compare to illiquid ETFs which have expensive transaction costs.

Qualitative

  • How risky?
    • Other than general market ups and downs as risk factors to ETFs, an ETF can be exposed to risk from counterparty (3rd party) activity and engagement in securities lending, as examples. Scalable Capital favours ETFs that have, by construction and management practices, low risk profiles. They favour physical replicating ETFs (i.e, the ETF issuer holds the actual securities included in the index) over synthetically replicating ETFs (i.e, the issuer engages in activities such as swaps that involve a counterparty risk).
  • How tax friendly?
    • The design of an ETF can have tax implications for you, the investor. As tax legislation varies from country to country, Scalable takes takes simplicity and transparency with respect to taxation into account when determining or adapting the ETF universe.

Scalable Capital ISA

Scalable Capital launched its ISA product recently, making it easier for savers and investors to generate wealth without the effects of taxation.Any investments held in a Scalable Capital ISA will be free of capital gains tax when sold and there is no income tax on interest or dividends within your ISA. Additionally, income or gains from the ISA don’t have to be declared on the individual tax return.

We will be covering the Scalable Capital ISA in a separate piece, but for more information on opening a Scalable ISA, visit their detailed FAQs section here.

 

Disclaimer: A Stocks and Shares ISA may not be right for everyone and tax rules may change in the future.

Scalable Capital Investment Performance

Because Scalable Capital has not been trading for a full year, under FCA rules, it cannot publish performance statistics yet. As soon as they are available, we will display them, as approved by Scalable itself!

But, we can reveal that Scalable Capital currently has £1.5-3m growth in weekly AuM and an average of £35-40k investment per client.

Fees

Scalable Capital makes it affordable for investors to start generating wealth in a way which is efficient, transparent and simple.

  • All-in fee
    • 0.75% p.a
  • ETF average fee
    • 0.25% p.a

= 1% p.a of AuM

Here is a screenshot example of how the fees impact your investment when compared to a traditional service.

Graphic 3: Fee comparison traditional investment service versus Scalable Capital service.

*Fees are calculated on a daily basis; the Fee Schedule can be viewed in the Investment Management Agreement.

Conclusion

Scalable Capital is considered one of the top robo-advisors in the country. It has made headlines across Europe having first launched in Germany and more recently the UK. The robo-advisor has accrued over 1,600 clients, growing week-on-week at a rate of up to £3m AuM. No mean feat. The expert team, mainly deriving from Goldman Sachs and including Prof. Dr. Stefan Mittnik as an academic with a global reputation, is keen to support retail investors with generating wealth without the hassle and expense associated with employing a financial advisor.

You should be very conscious of the minimum investment amount – £10,000 – as this is not necessarily for those with small amounts of spare cash. Also, you may need to get comfortable with handing over your money to be managed at the discretion of a digital investment manager, so to speak. Lastly, Scalable Capital unfortunately cannot display performance statistics at present due to FCA rules, but guarantee they will be available in 2017. So it will be at your own determination whether you entrust your money with this robo-advisor or not, but given their stature in the market it may not be such a hard hurdle to jump.

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