Scalable Capital Review: Loan Book Analysis
If you are new to investing and want the hassle removed from allocating capital, or you want to move away from your traditional financial advisor (FA), a robo-advisor like Scalable Capital (Scalable) could be a sensible option for preserving or generating your wealth over the long-term.
‘to provide a wide group of investors with access to an investment service which was previously reserved for the very wealthy’
Scalable Capital is considered one of the top robo-advisors in the UK and is the fastest growing in Europe, having first launched in Germany and more recently in the UK. Scalable Capital has accrued over £200m in assets from more than 6,000 customers and recently announced that BlackRock, the world’s largest asset manager, had taken a stake in the company. No mean feat. The company’s founding team has excellent pedigree, coming largely from Goldman Sachs and including Prof. Dr. Stefan Mittnik, an academic with a global reputation.
Scalable Capital provides investors with diversified, efficient, multi-asset class portfolios, designed to meet their personal investment objectives and risk tolerances. Similar to other UK robo-advisors, Scalable Capital constructs investor portfolios by diversifying capital across a range of asset classes including cash, government bonds, corporate bonds, equities, commodities and real estate. These asset classes are accessed using cost-efficient Exchange Traded Funds (ETFs). Uniquely, when compared to other UK robo-advisors, Scalable Capital’s proprietary technology is then used to continuously monitor the risk levels of a portfolio against its targets and, if required, will adjust the portfolio’s asset allocation accordingly. For example, if the portfolio is currently exceeding its risk target then the portfolio may be automatically adjusted to reduce allocations to equities in favour of bonds.
Such dynamically managed, multi-asset class portfolios have previously only been available to wealthy individuals or institutional investors; Scalable Capital is aiming to bring this to the mass-market at a reasonable price using state-of-the-art technology.
Investors interested in Scalable Capital should note that the minimum investment – £10,000 – means that the product is not for those with small amounts of spare cash. As with all robo-advisors, investors will also need to be able to get comfortable with handing their money over to a digital wealth manager, as opposed to a financial advisor that they can meet face-to-face.
‘Dynamically managed, multi-asset class portfolios have previously only been available to wealth individuals or institutional investors; Scalable Capital are aiming to bring this to the mass-market at a reasonable price using state-of-the-art technology.’
Read on to gain an in-depth understanding of Scalable Capital. Maybe this is the investment manager for you?
Benefits of a Scalable Capital Investment
- Access to product
- All-in-one service.Digital discretionary manager makes investment decisions on your behalf.
- Asset allocation decisions and portfolio rebalancing can be time consuming and costly if DIY.
- Portfolio details (performance, allocation changes, etc.) can be monitored 24/7 via Scalable Capital’s app or online portal.
- Lower cost
- 0.75% p.a. Scalable Capital fee + 0.25% p.a. ETF fee (avg).
- More expensive than a DIY service, but cheaper than accessing many pooled vehicles (with fees ranging from 1-3%) or hiring an independent financial advisor.
- Risk management
- There are 23 risk categories (from 3% VaR to 25% VaR) available; clients can select from all or a limited sub-set of those based on the results of the suitability check.Proprietary technology is used to determine the risk in portfolios daily against targets and, if required, portfolios will then be automatically re-allocated.Portfolio monitoring and suggested allocation changes are conducted with the help of an algorithm running Monte-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, which can be difficult, or rely on a financial advisor, which can be costly.
- No hidden fees, no kick-backs, no commissions.Details on the empirical foundation of the risk methodology can be found on the website and in a detailed whitepaper.The full investment universe is shown on the website, the initial portfolio allocation based on the client’s specific risk category is displayed during the sign-up process and portfolio allocation and real-time performance can be viewed through your secure customer login at all times.
- 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 login portal.
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. It is these benefits that have seen robo-advisors like Scalable Capital increase in popularity over 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.’
Scalable Capital’s Sign-up Process
Scalable Capital’s investment process is built around you, the client, taking both investment goals and individual risk tolerance explicitly into account. Every individual portfolio is continuously monitored and managed with Scalable Capital’s proprietary risk management technology.
Graphic 1.0: personal user sign-up process, Scalable Capital Ltd
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, multi-asset class ETF portfolio. Remember that this is just your initial portfolio allocation, but that it will change over time as your allocation needs to be adjusted to stay in-line with your risk category.
he sections and questions included in the questionnaire are as follows:
- 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., self-directed investing, IFA)
- Regular net income
- Monthly outgoings
- General Investment Account displayed as an output of the questionnaire
Scalable Capital’s Investment Strategy
Graphic 1.1: user Investment Strategy, Scalable Capital Ltd
Scalable Capital’s 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.
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.’
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.
ETFs are an excellent way of accessing a basket of assets, such as equities and bonds, in a cost-effective and highly liquid way. These features mean that ETFs have become a staple vehicle for use by robo-advisors around the world. Scalable Capital has built an algorithm to help them select the best ETFs out of a universe of 1,500 in the UK, and to make sure they spot a better ETF as soon as it becomes available.
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:
- 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 the investor.
- How liquid?Scalable prefers highly liquid ETFs, which are considered large (in terms of market capitalization) and established (in terms of issuance date) compared to illiquid ETFs which have expensive transaction costs.
- 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 physically 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 Capital takes transparency and simplicity with respect to taxation into account when determining or adapting the ETF universe.
For more information, please click the White Paper link in the ‘Scalable Investment Process’ section of this review or read the “Investment Universe” section on their website
Scalable Capital ISA
Scalable Capital also offer an ISA product, 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.
For more information on opening a Scalable ISA, visit their detailed FAQs section here.
Scalable Capital Performance
Scalable Capital has now started publishing their portfolio’s average performance since the launch of their UK business, along-with data on portfolio declines relative to individual asset classes. For an indication of Scalable Capital’s performance, you can visit their page here.
Investors should be conscious that reviewing investment performance is notoriously difficult and it has been constantly proven that historical performance is not an accurate indicator of future returns. Ultimately, investors need to be comfortable with the risk profile of their portfolio and believe in the investment strategy employed by Scalable Capital. Scalable Capital makes it easier than most for investors to gain the comfort they need in this way due to the complete transparency of their investment process.
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
- ETFs average cost
- 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.
*Fees are calculated on a daily basis; the Fee Schedule can be viewed in the Investment Management Agreement.
Scalable Capital Review Conclusion
Scalable Capital is spearheading one of the most innovative managed investment services on the market. The high investment minimum cannot be avoided, but for those who can afford it, this market leader could be a promising investment solution providing fully transparent, efficient portfolios with superior risk/return profiles which were previously only accessible to the very wealthy.
Editors note: This post, Scalable Capital Investment Review, was originally published 19th November 2016, at a time when robo-advice was an investment service Orca was exploring. It has been updated for accuracy.