Syfe’s investment philosophy is defined by ARI, short for Automated Risk-managed Investing. Of all the investment strategies out there, you could be wondering why we have chosen to focus on something as foundational as risk management.
Well, if our combined investment team experience of over 100 years in finance has taught us one thing, it is that returns cannot be accurately predicted, but risk can be managed. Think about what the Risk Disclosure statement in every investment document proclaims: Past performance is not a guarantee of future results.
But risk, as measured by the volatility of returns, can be reliably estimated using past data as seen from the chart below.
Over a period of 20 years from 1999 to 2018, we further found that systematic risk – the investing risk stemming from broad factors such as inflation, recessions, currency fluctuations, etc – correlated highly with returns.
Our investment strategy is thus grounded in the principles of risk management. In fact, we have developed ARI, our proprietary investment methodology, to provide investors with personalised investment portfolios that are in sync with their individual risk profiles.
ARI observes and forecasts market volatility. It detects tremors of volatility in the markets (or lack thereof), and rebalances portfolios accordingly and when required. The end result is that ARI helps investors achieve better risk-adjusted returns while keeping their portfolio risk in check with their desired risk exposure.
Translation: Investors sleep more soundly at night knowing that their investment portfolio is correctly structured, and they are not taking on excessive risk for no corresponding return.
Know your risk appetite before you invest
Different individuals will perceive risk differently, depending on their temperament, knowledge, experience and a whole host of other factors. A stunt car driver may seem like a professional daredevil, but he could be very much risk-averse financially.
Understanding your personal risk tolerance can help you invest better and with greater confidence. For instance, if you are investing to prepare your child for university five years later, you will know not to take on too much risk since a short-term market correction could potentially affect your investment goal.
At Syfe, all investors begin their investing journey by taking our Risk Profiler to help discern their correct risk appetite. We then recommend a Downside Risk level based on their personal risk tolerance.
And rather than describing our investment portfolios with vague terms such as “conservative”, “balanced”, or “aggressive”, we use these Downside Risk levels (which range from 5% Downside Risk to 25% Downside Risk) to label our different portfolios. This is so investors know right from the start, the level of risk they are taking on.
Defining Downside Risk
Simply put, an X% Downside Risk portfolio means that in the next 39 out of 40 years, the portfolio should not lose more than X% of its value in a given year. For example, a 17% Downside Risk portfolio should not lose more than 17% of its value in a given year, in the next 39 out of 40 years.
The point to remember is not that you may lose 17% of your portfolio, but rather, we have endeavoured to define a possible loss level with a 97.5% probability. If you are an investor willing to accept a 17% Downside Risk, you are comfortable with a 2.5% chance of losing more than 17%.
In the event where your portfolio threatens to exceed this potential risk of loss, such as during a recession, your portfolio is automatically rebalanced to ensure your portfolio risk remains within your chosen Downside Risk level.
But how? This is where ARI comes in. Based on your chosen Downside Risk level, ARI builds you a customised investment portfolio, allocating assets which have shown the best return for your risk profile. Thereafter, ARI continually monitors your portfolio to keep your portfolio risk in line with your desired Downside Risk level.
What does this mean for you?
To illustrate how ARI helps you achieve better risk-adjusted returns, let’s consider how ARI would have performed during the 2008 Financial Crisis. 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 points indicated on the graph below. Your portfolio would have experienced smaller drawdowns compared to our benchmarks, while your portfolio risk would have been kept aligned to your desired risk level.
Conversely, during periods of market calm, ARI will adjust your portfolio allocation to weight more heavily towards higher-risk assets. Your overall portfolio risk is still kept in line with your desired risk exposure, but you can now capture the market upside as well.
ARI’s performance during the quieter months of 2017 highlights how Syfe achieved benchmark-beating returns by maintaining your desired risk level across all market conditions.
In short, ARI helps you avoid investing risks that do not pay off while enabling you to take on risks that you get rewarded for, all according to your personal appetite for risk – just as a real wealth manager should do for you, but round the clock.