You will be able to read a robo-advisor's portfolio page and describe its holdings and rebalancing rules.
Arjun's suggested portfolio has a friendly name and a pie chart in five colours. Tap a slice and it shows a short label: "Developed markets equity", "Emerging markets equity", "Global bonds". He wants to know what is actually inside each slice, who runs it, what it costs and what happens when one slice grows faster than the others.
This lesson takes a robo portfolio apart. It follows lesson 4.1, From questionnaire to portfolio, where Arjun was placed in a model.
A robo-advisor does not usually pick individual shares or bonds for you. It builds each model from funds, and the funds do the stock-picking or index-tracking underneath.
Providers use two main kinds. Some use ETFs, exchange-traded funds listed on a stock exchange, usually ones that track an index, such as a world equity ETF or a global bond ETF. Others use unit trusts, often in institutional share classes, which you met in lesson 2.3, Same fund, different price: share classes. These classes are normally open only to large investors and carry lower charges, and the robo-advisor can reach them because it pools many clients' money. Some providers mix both.
Every provider publishes the funds in each model, usually on a portfolio page or in a document you can download. For each fund you should be able to find its name, the share of the portfolio it makes up, called its weight, and its expense ratio. A portfolio page might look like this, with weights made up for the example: a developed markets equity fund at 50%, an emerging markets equity fund at 10%, a global bond fund hedged to Singapore dollars at 30%, and a short-term bond fund at 10%. That model holds 60% in equities.
Look the funds up in their own documents, not only on the robo's page. A fund's factsheet, from lesson 1.3, Find the facts in a fund's three key documents, tells you what the fund holds and what it charges.
The weights do not stay put. Markets move, and the funds move by different amounts. After a strong year for shares, the equity slices make up more of the portfolio than the model intends, and the portfolio is riskier than the level you were placed in.
Rebalancing brings the portfolio back to its target mix by selling some of what has grown and buying more of what has shrunk. It keeps your risk where you agreed it should be. It is not a way to raise returns, though it does mean the portfolio sells some of what has risen and buys some of what has fallen as a matter of routine.
Here is a simple example with made-up figures. A portfolio starts at S$20,000, with S$14,000 in equity funds and S$6,000 in bond funds, a 70/30 mix. Shares rise 30% and bonds stay flat. Equities are now worth S$18,200 and the total is S$24,200, so equities make up about 75.2%. To return to 70%, the equity share should be S$16,940, so the robo sells S$1,260 of equity funds and buys S$1,260 of bond funds.
Providers use one or more of three methods, and the portfolio page or the terms will say which.
Calendar rebalancing happens on a schedule, such as every quarter or every year, whatever the weights are. It is simple and predictable, but it may trade when the drift is tiny, or wait while the drift is large.
Threshold rebalancing, sometimes called drift-triggered, happens only when a weight moves more than a set amount from target. With a five-point band on the example above, a 20% rise in shares would take equities to about 73.7%, inside the band, and nothing would happen. The 30% rise took them to 75.2%, outside it, and triggered the trade.
Cash-flow rebalancing uses your new deposits and withdrawals. Money you add goes to whatever is underweight. In the example, a deposit of S$1,800 put entirely into bond funds would bring the portfolio back to 70/30 without selling anything, which avoids the costs and any taxes that selling can bring in some cases. It only works if you keep adding money.
Many providers combine these: they use deposits first, and trade when drift passes a threshold.
One more thing to read. A robo-advisor can change which funds a model uses, or change the models themselves, for example by replacing one fund with a cheaper one, or by adding a new type of asset. That is part of what you pay it for. It also means the portfolio you signed up for is not fixed. Read how the provider tells clients about these changes, whether by email, in the app or only on its website, and whether you are asked first.
In the activity below you will find one robo-advisor's published portfolio and list each fund, its weight and its expense ratio.
Find one robo-advisor's published portfolio and list each fund, its weight and its expense ratio.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).