So you go off on holiday, all happy because your new guide to direct platforms and robo-advice has launched. You come back, and some rotten sod has gone and launched while you were away and spoiled all your tables and that.
The rotten sod in this case is Scalable Capital. To be fair, weâ??ve known it was on the way for a while, but too late for us as we went to press with our guide. Sods. But you can’t hold a grudge and so Iâ??ve been taking a bit of a closer look; here are a few thoughts.
First off, itâ??s important to say that SC isnâ??t a robo-adviser in the way that any of the Parmenion-powered propositions or, say, Betterment in the States are. Thereâ??s no advice here; but there is discretionary investment management. Sort of like what you got from Nutmeg before Nutmeg started offering regulated advice.
THE BASICS: NO DICKING AROUND
In terms of design, SC looks predictably lovely. I havenâ??t been able to open an account as Iâ??m not stumping up the Â£10k you need to do so, so Iâ??m depending on filmed demos and so on that you can find pretty easily online. The dashboard looks very similar to other robos â?? again, Betterment came to mind â?? but with a nice dark colour scheme. Everythingâ??s well laid out and if we were car journalists weâ??d probably be saying that all the controls fall easily to hand.
One thing that may surprise some who view online propositions like this as a way to get people interested in dicking around with investments is just how little dicking around you can do. This appears to be quite deliberate â?? SC wants you to trust the process and be hands off from there. Youâ??re really buying into an investment management philosophy with Scalable; Iâ??ll cover that more in a moment.
In terms of the basics, itâ??s GIA-only for the moment, with an ISA to come and no doubt once SC works out that all the readily accessible investable wealth in the UK is in pensions, a pensions wrapper too. Incidentally, look carefully at the next set of announcements from Nutmeg to see whether the addition of pensions has made a difference to its key numbers (the ones it discloses anyway).
Charges are 0.75% flat for the service and 0.25% for the CAREFULLY SELECTED BASKET OF ETFs. No lock-ins, additional charges or ulterior motives so far as I can see.
INVESTMENTS AND THAT
OK, so that investment philosophy. Unlike anyone with sense, Iâ??ve read the 32-page Scalable Capital investment methodology white paper from cover to cover, and what you get seems to my simple mind to be three core components:
- Value at Risk, Expected Shortfall and Maximum Drawdown as the drivers of asset allocation, modelled forward via daily Monte Carlo simulations. These lead to 23 risk categories, labelled by VaR. As SC says, â??an investor choosing risk category 12 wants to limit downside risk so that an annual decline of more than 12% should occur on average only once in 20 yearsâ??.
- â??Risk clusteringâ?? â?? basically (this is a gross oversimplification) a technique that suggests that it is more possible to predict risk than price based on current conditions. As a result, rebalancing moves from portfolio weighting and Markowitz-style modern portfolio theory, to a risk-driven approach. It is well scientific and that.
- Discretion â?? itâ??s possible for the team to step outside the algorithm and change asset allocation when weird stuff is going on. SC has been vocal on saying it made 12% for investors over Brexit; a claim which will certainly come with a few footnotes.
Whether Scalable Capital is for you, then, depends on whether you like this different approach to the more common portfolio management / auto-rebalanced techniques offered by many of the robos. Do you believe that VaR driven management is a good way of optimising allocation, or do you think that it exposes you to sub-optimally priced trades and in fact can accelerate a race to the bottom? Do you think that Engleâ??s risk clustering framework is a goer, or are you all Markowitzy? Are you happy that the humans can trump the machines, or are you suspicious of meatsack bias?
Almost certainly, unless youâ??re an alpha geek, you donâ??t care. On that basis, and if you have Â£10k or more to invest, Scalable Capital looks really interesting to me. Weâ??ve written before â?? not least in the Guide â?? that the robo market looks like â??different restaurant, same menuâ?? â?? a bunch of pretty websites with broadly the same ETF proposition under each one. Scalable is a new twist on this, and thatâ??s welcome.
In common with all these types of propositions, distribution is the thing that will make the difference. SC may well be being built to sell; in the meantime I suspect it will struggle to find big value pools to attack (although its retargeted adverts are already hunting me round the web). That may not matter to its VC funders, but in a world where you can buy Vanguard Lifestrategy through a decent platform for just over 0.5% all in, thereâ??s a lot to prove. Weâ??ll look forward to watching it play out.
In the meantime, if you want to read Leithâ??s leading independent platform consultancyâ??s analysis of the online investing market, along with many pictures of aggressive cats, just click the pic and download to your heartâ??s content â?? itâ??s free.