Investment Model and Risk Management

Is Scalable Capital an Active Wealth Manager?

No, not in the classical sense. We offer passive financial investments with dynamic risk management. We invest in the various asset classes (e.g. shares, bonds, commodities etc) exclusively through passive ETFs. The weight of each asset class in your portfolio is calculated by our risk management model and automatically adjusted over time, so in the strict sense of the word your portfolio is actively managed.

We only make adjustments to your portfolio if our model forecasts an over- or undershoot of your downside risk. Therefore your investment risk is always controlled dynamically.

Unlike a traditional active asset manager, we do not make any adjustments to your portfolio based on opinions on the performance of certain asset classes. An active asset manager selects individual stocks based on expected price movements (so-called stock-picking). Countless empirical studies have shown, however, that this is not effective. Our investment strategy accepts that returns can not be predicted, and instead relies on the fact that risks can be predicted with reasonable accuracy.

Can I Change the Investments in My Portfolio Myself?

At Scalable Capital we believe that human emotion and behaviour is one of the main contributing factors to why portfolios underperform. We offer a carefully designed dynamic risk management service at low-cost. Individual interventions in your portfolio will jeopardise the implementation of our investment strategy. For this reason, we do not allow you to change the investments in your portfolio.

However we do ask you to update us periodically with information on your investment goals, your financial situation and your knowledge/experience. Should there be any significant changes, we will determine a new investment strategy for you to ensure the new strategy is suitable. You also have the ability to re-take our risk questionnaire at any time should you wish to.

Why Are the Risk Categories with Scalable Capital Labelled as Percentages Rather Than with Explanatory Names?

In the financial industry, the description of different investment strategies are often quite vague, using terms like “moderate” or “conservative”. At Scalable Capital we consciously avoid these vague concepts that don’t give investors any specific information, and instead utilise ‘percentages’ so as to give investors a precise understanding of the potential risk to which they are exposed.

The ‘percentages’ represent a potential annual loss, which is referred to as the Value-at-Risk (VaR). The VaR should not be exceeded with a probability of 95%, which means if the VaR were 12%, only once in 20 years should a loss greater than 12% occur.

We believe this method is superior to ‘static’ descriptions. Experience has shown us that financial market risks vary considerably over time and in particular are elevated in times of crisis. A so-called “moderate risk” portfolio with an allocation of, for example, 40% in equities and 60% in bonds would indeed have a “moderate risk” profile when the markets are in a “normal” phase. However in times of market turmoil, the risk in the market and the moves associated with it would be much greater. This means that holding “moderate risk” could now result in large percentage losses.

By framing risk in such a way our clients therefore know from the outset how much downside risk they are taking. They know this in clear percentage terms, and not dependant on market conditions. If at any time their portfolio threatens to exceed this loss risk, a risk-reducing portfolio reallocation is carried out automatically. Conversely, during periods of relatively low market risks, our model carries out a risk-enhancing reallocation to realign the risk in the portfolio with the agreed loss level. By doing this we ensure no return potential is wasted due to an overly conservative portfolio. The result of all this is that your investment risk is always controlled dynamically and does not fluctuate with the risks on the financial markets.

In summary, the following applies: Risk is the currency the investor uses in exchange for returns. Our clients decide how much risk they want “to put on the table”.

What Is Value-at-Risk (VaR)?

VaR is a probabilistic measure of market risk. The most traditional measure of risk is volatility. The main problem with using volatility to measure risk is that it ignores the direction of market movements. VaR is based on 3 components: a loss amount (percentage), a confidence level and a time frame. A typical example would be: what is the maximum percentage I risk losing over the next year with a 95% confidence i.e. in 19 out of 20 years I would expect to lose less than this. VaR can be calculated for a set of historical data by looking at the actual returns and putting them in order of worst to best. In our 95% confidence example the worst 5% would be all the values below our VaR.

Can I Lose More Than the VaR in My Portfolio?

The VaR is a measure and it aims to show the maximum loss you might suffer with a 95% confidence. This means it is possible to lose more than the VaR of your portfolio but the likelihood should only be a 1 in 20 chance.

How Well Diversified Is My Portfolio?

At Scalable Capital we use diversification as a tool to help us achieve the maximum possible expected return for a given level of risk. Risk diversification is essential for successful long-term investing. Scalable Capital invests globally in fourteen different asset classes that represent over 8,000 individual stocks ​​from up to 90 countries. We invest in carefully selected exchange traded funds (ETFs), which track the performance of various indices such as the FTSE-100.

Diversification is more effective, the less the various investments in the portfolio move in tandem. To that end, our technology takes into account the constantly changing correlations between asset classes. This is important as it enables us to so create an optimal portfolio for our investors in every kind of market. We use methods that go far beyond traditional modern portfolio theory, as we know our clients need a portfolio which is diversified in all market environments whether we are in a bull market or even in times of crisis.

How Often Do You Adjust the Allocation of My Portfolio?

Our risk management technology constantly checks the risk level of your portfolio. If our model predicts a higher loss potential than you have specified for your portfolio, we will execute a reallocation from a riskier asset class (such as stocks) into a lower risk asset class (such as government bonds or money market funds). In quiet market conditions, a shift takes place in the opposite direction. We make adjustments as often as is necessary to keep your risk of loss at the level predefined when you created your portfolio and selected your VaR (Value-at-Risk).

On average we expect our model to adjust your portfolio allocation weekly. We aggregate the orders to be carried at the same time for all of our client portfolios so as to minimise the cost of trading.

For further information you can download our White Paper.

How Does Our Investment Model Work?

The way we create your portfolio is by selecting a combination of Exchange Traded Funds (ETFs) representing different asset classes and regions designed to maximise your potential return. This is whilst maintaining your risk at a level you have predetermined that you are comfortable with. We then run our optimisation model on a weekly basis taking into consideration your current portfolio allocations, new real time market data and our projections of future risk in the market. The result, which our trading system returns, will be your new optimal portfolio and we will make the adjustments to your portfolio that day to ensure your money has the best expected returns for your risk category.

For further information you can download our White Paper.

Can Risk Be Predicted?
Can Scalable Capital's Technology Predict the Next Stock Market Crash?
Can You Achieve Better Performance Through Risk Management?
Can I Have Multiple Accounts with Different Risk Categories?

Yes, our clients are able to open a GIA (general investment account), an ISA (individual savings account) and a SIPP (Self Invested Personal Pension) . You are able to hold all accounts with Scalable Capital. These accounts can have different risk categories, as we understand people sometimes want to take different risks with money, which is being invested for different goals. You are also able to hold multiple GIAs with different risk categories. In order to open a SIPP, please contact our client services team.

Can I Set up a Monthly Savings Plan / Do You Accept Recurring Payments?

Yes. We accept both lump sum deposits and recurring payments. You can set this up when you open your account or you can do it at a later date from your account homepage when you log in. You have the option of setting up a standing order.

Recurring payments are a great way to help you to save regularly and build your wealth over the long term. Any monthly payments you make will be added to your account and invested in the market, along with your current investments and according to the same risk category you have already selected.

How Much Should I Invest?

You can invest as much or as little as you like in your Scalable Capital account. We have a minimum amount of £10,000 and in the current 2020/21 tax year the maximum you can contribute to your ISA account is £20,000. However, you can always contribute your full ISA allowance in an ISA account and then any further additions can be made to a General Investment Account.

We also recommend that all investors maintain an emergency fund outside of any investments you hold with Scalable Capital or anyone else. This amount can vary but a common guideline is to keep 6 months regular outgoings as available cash so that, should you need access to money quickly, you have it.