StashAway’s Economic Regime-based Asset Allocation (“ERAA”) framework builds and manages portfolios by targeting different level of risk and attempting to maximize net investment returns at each risk-point.
The framework is dynamic and strategic in nature, and it is built on 4 pillars: (i) Regime-based asset allocation, (ii) Risk Control, (iii) Valuation Gaps, and (iv) Managing Asset-specific Risk
The First Pillar (Regime-based Asset Allocation) is at the core of ERAA’s portfolio construction logic, and uses economic data to adjust the target strategic asset allocation at each risk level. The main assumption behind this pillar is that the economy ultimately drives medium term markets’ returns.
The Second Pillar (Risk Control) is the risk management layer of the framework, tasked with identifying cases in which economic data either are unclear or are not driving market behaviour. If the momentum (rate of change) of growth and/or inflation isn’t solid enough to provide predictive guidance, ERAA® adjusts our clients’ portfolios to an All-Weather strategy until the direction of economic data is clear again. The All-Weather strategy is designed to simultaneously protect capital and perform well in uncertain economic conditions.
The Third Pillar (Valuation Gaps) takes into account each asset class’ valuation to underweight overvalued assets and discover opportunities to overweight undervalued assets. Valuation Adjustments are based on economic regressions, and therefore are anchored around ERAA’s main assumption that the economy ultimately drives medium term markets’ returns.
The Fourth Pillar (Managing Asset-specific Risk) sets asset allocation limits based on the historical relative performance of each asset compared to the portfolio's same-risk benchmarks. Taking into account an asset's historical performance, ERAA® adjusts its maximum allocation. This ensures that any idiosyncratic drawdowns in a specific asset don't have an outsized impact on portfolio performance.
Read our white paper on StashAway’s investment framework to know more about ERAA®.
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