AutoWealth launches AutoWealth Plus+ and here’s what you should know

Loyal readers would know that I have been advocating to invest in a globally diversified portfolio of Exchange Traded Funds (ETFs) and I strongly believe that the simplest way to do this is through a robo advisor.

Putting my money where my mouth is, I have been investing in a globally diversified portfolio of with an asset allocation of 80% stocks and 20% bonds through the AutoWealth robo advisor platform since 2017 and my portfolio has gained 8.06% in time-weighted anualised returns.

What’s even better is that I have automated the entire process such that money would be transferred to AutoWealth at the end of every month after my salary is credited and the platform will automatically invest in all the ETFs. By automating the entire process, I am able to focus on the more important things in life.

Recently, I’ve received an email from AutoWealth, announcing a soft launch of their new product offering, AutoWealth Plus+ (AW+). At the same time, the 4 portfolios that they offer to customers after analysing their investment horizons and risk appetites have been rebranded to AutoWealth Starter.

The AW+ soft launch was intended for existing customers and would close after reaching an aggregate S$10 million portfolio value. The reception for the soft launch was so good that the S$10 million portfolio was filled within 2 days after they announced it. I heard that many investors were disappointed that they were not able to get in on the action quick enough.

I know that many readers have signed up and invested with AutoWealth so I contacted AutoWealth to get more information about AW+ to share with all of you before its official launch.

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Enjoy $20 direct top-up into your account when you sign up

Here’s a sweet deal that the folks from AutoWealth has specially extended for my readers. Sign up with AutoWealth using referral code get20jan2018 and receive a $20 direct top-up into your account after it’s created.

PS: When you sign up using my referral code, I will also receive a $20 direct top-up into my AutoWealth account.

What’s the difference between AutoWealth Plus+ and AutoWealth Starter?

The risk-based portfolios offered in AutoWealth Starter are a mix of globally diversified ETFs that are easy to understand and meant to work towards your essential goals in life. AutoWealth Starter should still continue to be the foundation of your investment portfolio with your AW+ portfolio as a complement to your overall investment portfolio once you become more knowledgeable and advanced in your investment decision-making.

AW+ is positioned as a thematic offering that features curated robustly designed portfolios with double-digit historical performance, featuring 100% equity (stocks) and relatively higher geographic, industry or investment style focus. As the portfolios consists of 100% equities with a concentrated focus, you should only consider AW+ if you can accept higher risks, have a long investment horizon and unwavering holding power.

AW+ Thematic Portfolios

AutoWealth has launched AW+ with 4 thematic portfolios centred on key global trends – Future 2050, Future of Digital Economy, Growth & Momentum and Pandemic Turnaround. While the details of these portfolios are not available on their website yet, I’ve done an in-depth research on each of them for your analysis.

Future 2050 Portfolio

Future of Digital Economy Portfolio

Growth & Momentum Portfolio

Pandemic Turnaround Portfolio

What is a thematic portfolio?

Thematic portfolios are designed to capitalise on long-term megatrends that will transform the world tomorrow. Some thematic portfolios also follow social, economic, corporate, demographic, or other themes that are popular in society. By investing on a thematic portfolio, it allows investors to ride on the identified megatrend and profit from it.

When examining a thematic portfolio, it’s important to understand the investment objectives of the portfolio and the underlying stocks that the portfolio invests in. In order to understand how AW+ thematic portfolios are curated, it is important to not only understand the investment objectives of the portfolio, but to also understand each of the ETFs that the portfolio will be investing in on your behalf.

Here are my thoughts on the 4 AW+ thematic portfolios that are being offered.

Future 2050 Portfolio

The Future 2050 Portfolio is suitable for investors looking to capitalise on futuristics multidecade macro trends. The Future 2050 Portfolio aims to provide above-market returns through its allocation to technology & healthcare companies and some defensiveness against economic contraction & market volatility through its diversification in minimum volatility companies.

The overall fees of the underlying funds are reasonable as Vanguard Information Technology ETF which commands 58.3% of the portfolio only charging an expense ratio of 0.1% and the rest charging 0.42% and below.

I like that the focus of this portfolio is very specific – Technology and Healthcare, as intended. When all the holdings in the ETFs combined together, 53.22% of the portfolio is invested in the Technology sector and 33.52% of the portfolio is invested in the Healthcare sector.

ETFs curated for this portfolio:

  • Vanguard Information Technology ETF (58.3%)
  • iShares U.S. Healthcare Providers ETF (10.6%)
  • iShares U.S. Medical Devices ETF (10.6%)
  • SPDR S&P Biotech ETF (10.5%)
  • iShares MSCI USA Min Vol Factor ETF (10%)

Future of Digital Economy Portfolio

The Future of Digital Economy Portfolio is suitable for investors looking to capitalise on futuristics multi-year macro trends. The Future of Digital Economy Portfolio aims to provide above-market returns through its allocation to fintech, internet & ecommerce companies and some defensiveness against economic contraction & market volatility through its diversification in minimum volatility companies.

Many investors would zero in on this portfolio because it consists of some of the more trendy ETFs from ARK Invest that have reported 3-digit returns in 2020. But do note that both ARK’s ETFs are actively managed so performance is highly dependent on ARK’s capabilities and experience. As ARK Fintech Innovation ETF was only launched in 1 Feb 2019, I was not able to backtest this portfolio beyond one year and I didn’t want to exclude it for backtesting since it takes up more than 1/4 of the portfolio.

What investors should also take note of, is that the expense ratio of the ETFs in this portfolio (excluding iShares MSCI USA Min Vol Factor ETF) are more expensive, costing around 0.65-0.86%. Being concentrated in the technology sector, it is worth noting that the Future of Digital Economy Portfolio has the highest volatility among the 4 AW+ thematic portfolios, with an Annualized Volatility of 30.39%.

Unlike the Future 2050 Portfolio that consists of 99% U.S. stocks, this portfolio has more global presence with 29% of its funds invested in global stocks.

ETFs curated for this portfolio:

  • ARK Fintech Innovation ETF (37.2%)
  • ARK Next Generation Internet ETF (31.4%)
  • Amplify Online Retail ETF (14.9%)
  • The Emerging Markets Internet and Ecommerce ETF (6.5%)
  • iShares MSCI USA Min Vol Factor ETF (10%)

Growth & Momentum Portfolio

The Growth & Momentum Portfolio is suitable for investors looking to capitalise on companies with favourable multi-factor characteristics as backed by rigorous & well-established empirical studies. The Growth & Momentum Portfolio aims to provide above- market returns through its allocation to growth & momentum companies and some defensiveness against economic contraction & market volatility through its diversification in minimum volatility companies.

How does this portfolio execute its growth strategy?

The Vanguard Russell 1000 Growth ETF that tracks an index of US large- and mid cap stocks selected from the Russell 1000 Index with high growth characteristics. Stocks with higher growth is given proportional weights in the index.

Let’s examine the strategy for momentum investing.

Momentum investing is an easy-to-understand concept – certain stocks in strong uptrends can continue rising, while stocks that are faltering can continue plummeting. It is one of the more widely followed investment factors, with plenty of smart beta products offering investors exposure to various momentum-based strategies. The iShares Edge MSCI USA Momentum Factor ETF is a popular momentum ETF in the market today.

The Growth & Momentum Portfolio consists of low cost passive index ETFs that have low expense ratios of 0.08-0.15% which makes them really attractive from a cost perspective. However, the dilemma I have with this portfolio is that since it only consists of 3 ETFs and looks seemingly simple, why not invest in them on my own?

ETFs curated for this portfolio:

  • Vanguard Russell 1000 Growth ETF (60%)
  • iShares MSCI USA Momentum Factor ETF (30%)
  • iShares MSCI USA Min Vol Factor ETF (10%)

Pandemic Turnaround Portfolio

The Pandemic Turnaround Portfolio is suitable for investors looking to capitalise on the multi-year pandemic turnaround and aims to provide above-market returns through its allocation to consumer discretionary, lithium, clean energy, home construction & aerospace companies and some defensiveness against economic contraction & market volatility through its diversification in minimum volatility companies.

The Covid-19 pandemic is making a huge impact on the lives of many today. But if we look back at the pandemic 10 years later just like how we are looking at the Global Financial Crisis today, we will see how that dip in the financial market is a mere blip on the charts. No matter what, the markets will eventually recover over time.

Since the markets will recover over time, why don’t we start imagining what are the megatrends the world would be investing in after the pandemic is over? In the Pandemic Turnaround Portfolio, AutoWealth has curated a few megatrends to invest in to capture the opportunities that arise after the pandemic:

  • Consumer discretionary (goods and services that are considered non-essential by consumers, but desirable if their available income is sufficient to purchase them)
  • Lithium battery technology
  • Clean energy
  • Home construction
  • Aerospace

If you believe in these megatrends that AutoWealth has selected, consider investing in this portfolio.

ETFs curated for this portfolio:

  • Fidelity MSCI Cons Disc Index ETF (52.7%)
  • Global X Lithium & Battery Tech ETF (12.8%)
  • Invesco WilderHill Clean Energy ETF (11.8%)
  • iShares U.S. Home Construction ETF (7%)
  • SPDR S&P Aerospace & Defense ETF (5.7%)
  • iShares MSCI USA Min Vol Factor ETF (10%)

Performance-based fees

Unlike AutoWealth Starter risk-based portfolios where each portfolio is charged 0.5% management fees per annum and US$18 platform fees per annum, AW+ portfolios are charged an annual performance fee of 8% on the profits at the end of each calendar year.

To be more precise, AW+ portfolios are charged an annual performance fee of 8% on the profits in USD terms at the end of each calendar year, based on the portfolio value at the beginning and the end of the calendar year net of all fund deposits and withdrawals in USD terms throughout the calendar year. In the event the AutoWealth Plus+ portfolio is not in a profit position at the end of the calendar year, there will be no fees & charges for the calendar year. AutoWealth absorbs all brokerage fees, exchange clearing fees and custody fees irregardless.

AutoWealth is the first robo advisor (that I know of), that offers portfolios that charge fees based on performance.

From what I know, performance-based fees are often charged by hedge funds who would actively manage the assets under their management to maximise returns. The basis for performance-based fees is that they would align the interests of both fund managers and investors, and would motivate fund managers to generate positive returns. The standard practice is chargine a management fee of 2% of the fund’s net asset value and a performance fee of 20% of the fund’s profits.

Performance-based fees often include a high-water mark feature to ensure that the fund manager does not get paid large sums for poor performance. If the manager loses money over a period, he/she must get the fund above the high-water mark before receiving performance-based fees.

AutoWealth opted to design the fee structure for AW+ to make it simple and easy to understand. There is no high watermark feature and it’s associated computations which they felt, may be confusing for some customers. Instead, they had considered the impact of a hypothetical high watermark feature and reduced the annual performance fee to 8% to generally compensate for the hypothetical high watermark impact.

While I consider my AutoWealth Starter portfolio to be a low cost way to invest, I would not say the same for AW+. Based on the backtesting results, I could see that that if I were to invest in a AW+ portfolio today with a minimum sum of $10,000 and make a monthly contribution of $500, the performance-based fees would increase quite significantly if the portfolio continues to generate double-digit returns year on year.

But some investors would feel that the performance-based fee charged for AW+ is acceptable since the platform would only earntheir fees if their clients’ portfolios are profitable.

How I intend to invest in AutoWealth Plus+

Maybe you are now interested in investing in one of the AW+ thematic portfolios. If so, you’re probably wondering how much should you be investing into an AW+ thematic portfolio.

We must remember that AW+ thematic portfolios carry significant higher risks and you should not invest most of your money in them. I would invest with a core-satelite portfolio management approach, with my AutoWealth Starter as my core portfolio and AW+ as satelite portfolios.

Wait! What is a core-satelite portfolio management approach?

Imagine a diagram of the solar system. The sun is your core and all the planets are your satellites. The sun is the largest and the most massive object in the solar system, many magnitudes larger than any of the planets spinning around it. With that perspective, your core portfolio will form the bulk of your investment portfolio, whilst your satellite portfolios are a number of smaller portfolios with specific investment objectives, aiming to boost higher returns.

The goal with this portfolio management strategy is that none of the satellite portfolios would become so big that if things go badly with any of them, they will destroy your overall portfolio. The core-satelite portfolio management approach is a also good way to manage risk and generate a more reliable outcome to meet your investment goals.

Your core portfolio should ideally form about 60-70% of your entire investment portfolio with your satelite portfolios forming the remaining 30-40%. For more conservative investors, you can choose a 80/20 split between core and satelite portfolios. It’s entirely up to your preference.

For simple investors like me, my AutoWealth Starter portfolio with a 80/20 split between equities and bonds will form my core portfolio. I’ll pick 1-2 AW+thematic portfolios to form my satelite portfolios to ride on megatrends that I’m in favour of.

Because I have started investing in my AutoWealth Starter portfolio for over 3 years, it has grown quite substantially so a $10,000 initial investment into an AW+ thematic portfolio will not be sufficient to form 30-40% of my satelite portfolio. But it’ll progressively grow as I intend to invest a 1/4 of my monthly investment fund into my satelite portfolio so that it’ll grow along with my core portfolio.

What are your thoughts about the 4 AutoWealth Plus+ thematic portfolios? Share with me in the comments section below.

Photo by Mathieu Stern on Unsplash

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