August Invest Solutions – US

In this section we describe general investment and framework features for our global August Invest Solutions (AIS) and for those 4 standard products that are specifically designed for US (USD) based investors. We label this particular product, AIS US, although of course, it is a global solution build to capture long-term equilibrium returns. Not for the US only, but the entire world.

Please refer to the “Basic Access” or “Premium Access” for information on updated suggested portfolio compositions, expected returns, expected risk and the associated ETF funds we recommend. As with all August Invest Solutions, AIS US can be download for FREE as “ready-for-trade” standard solutions for 3 traditional risk profiles; low, medium and high.

Additionally, a Green and Climate-friendly but high-risk (+) alternative is offered in the August Invest Green solution. All profiles are calibrated to a high Environment, Social and Governance (ESG) score. AIS is a 100% passive and 90% robotized approach, and as such obviously differentiates from active management solutions in banks. AIS however, also differentiates from globally accessible index solutions, either in traditional asset management or on internet or even APP based platforms.

First, in the core framework,

  • You can access an already professionally constructed and client-driven solution for FREE.
  • You get 2 rebalanced solutions on 30.06 and 31.12 of every calendar year. For FREE.
  • You pay ONLY for unavoidable costs in underlying ETF funds. But this is NOT to investmentexcel.com.
  • You will not have to transfer wealth to a banking unit or Platform provider. Your portfolio assets stay with you.
  • You are responsible for trading your portfolio according to the selected August Invest Solution.

Second, in the investment universe,

  • All solutions have high ESG score as constraint
  • All solutions have tight asset weight constraints
  • All layers in investment are strictly passive and reactive to only long-term equilibrium conditions

AIS is consequently a super cost-efficient access to long-term globally responsible and diversified market returns. Investor in AIS is charged only with those small fees in the underlying and carefully selected passive (ETF) funds. All ETF funds fit into particular asset class groups and regions, that are identified in a quantitative algorithm founded on the principles defined by the work of Nobel Prize-taker Harry Markowitz (1952, 1959).

FREE Ready-for-trade Solutions

Investment philosophy

The framework of AIS is founded on the principles of market efficiency. Full and fair access to market information and instantaneous price adjustments to this information, makes any investor’s discretionary attempt to outsmart other market participants an act of irrationality.

At every point of time the market price fluctuates randomly around some true equilibrium intrinsic value of the asset. An investor can be lucky an buy the asset at a point of time, where it fluctuates below the true value. But, he can never set up a strategy or a “rule” to capture undervalued or overvalued assets. This follows logically from the premise of randomness. In finance no other scientists have contributed as much in this field as Professor Eugene Fama. Here are some of his famous quotes:

"Markets are efficient, but there are different dimensions of risk and those lead to different dimensions of expected returns. That's what people should be concerned with in their investment decisions and not with whether they can pick stocks, pick winners and losers among the various managers delivering basically the same product"

And

"I can't figure out why anyone invests in active management (…). Since I think everything is appropriately priced, my advice would be to avoid high fees"

After more than 50 years of vast theoretical and empirical research in the active-passive field, it still remains to be seen that active management at any level is a rational investor choice. Research unambiguously supports index management, and why today active management is still a trillion-dollar industry is a conundrum.

In the logical spirit of this strong academic support, August Invest Solutions as a concept, offers an umbrella of classical multi-asset fund-of-funds, implying that individual asset classes and potentially invest styles, are mimicked by underlying cost-efficient, liquid and heavily diversified funds. Most often Exchange Trading Funds (ETF). As such, it is a passive product, with no fees for any portfolio manager action, and no fees for portfolio managers trying to opportunistically outsmart the market in various cycles. It simply does not pay off.

No Opportunistic Active Trading

Investment Objective

Fama’s axiom is not only of philosophical and perhaps even logical nature. It is empirically supported on all global financial markets, that 1) higher risk gives higher return and 2) Investors cannot predict the future path of asset prices. Why? Because the asset price is random beyond some risk-related trend linked to microeconomic and macroeconomic fundamentals. It follows that the optimal way of investing, is to access, as cheaply as possible, large diversified and optimized portfolios, that are constructed to reflect investor’s individual risk-aversion. An individual investor choice based on the positive risk-return trade-off. Low risk low return. High risk high return.

Equilibrium Asset Allocationn - EAA

This is exactly what August Invest Solutions does. This is only what it does. It delivers core fat-free market returns that are identified by what is labelled “Equilibrium Asset Allocation” (EAA). EAA is the tool that bridges structural microeconomic and macroeconomic factors. In turn, delivering long-term equilibrium market returns. August Invest US portfolios are hence consistently indexed to a diversified representation of global financial return opportunities, but with a strong relatively strong US home-bias. We can see this from the portfolio constraints (when rebalanced).

Investment Constraints

All solutions are constructed subject to various individual constraints of,

  • RISK – Volatility (from 5%-13% p.a.)
  • Weights on asset classes and regions
  • Weights on Responsibility Score (ESG factor)
  • Weights on Green Climate Score (August Invest Green only)
  • Weights on “Home-Bias”

Note that currency risk is not included as all portfolios are defined based on their domiciles. So, here in the case of US investors, AIS portfolios have 100% USD exposure. The purpose of the constraints has two dimensions. First, that investor needs a “hard” target risk measure to relate to. This is defined by the classical “Risk” concept of standard deviation. Second, to build stable and cost-efficient portfolios, we need to add weights. August Invest Green is a special case, where a large exposure to global Green technology is required. The following hard risk measures apply,

5%August Safe

10% August Green

8% August Balanced

13% August Opportune

All target risks and target weights are obtained exactly every time the portfolios are rebalanced, which is done as a minimum twice a year on the dates, 30.06 and 31.12 in a year. But it is most likely that there will be interim rebalancing due to trigger events in the global economy and/or financial markets. www.Investmentexcel.com will in any of these events be updated accordingly. The “Premium Access” offers an individual monitoring and notification whenever an individual AIS product is rebalanced.

In the 4 tables below, we demonstrate asset class and regional constraints for US based investors. As all solutions have a “Home-Bias” constraint, US equities and bonds have minimum and maximum weights that are globally disproportional.

ESG and Green Factors In August Invest

Investment Process

The basis of building the final AIS US, is our Fund Selection process. In this process global passive funds in terms of index mutual funds and Exchange Traded Funds are selected from a variety of parameters. Note only the cost-charge, but also opening period and asset-under-management (AuM).

Within the defined risk and constraint framework we build optimal risk-adjusted portfolios by maximizing returns with some not-too-complicated math. Actually, by applying algorithms that are standard in the financial industry today and can be traced almost 70 years back to Markowitz (1952, 1959). All constraints are “hard” and initially calibrated through a delicate process of allowing maximum pass-through of equilibrium market returns, whilst still avoiding unwelcome unbalanced portfolio allocations.

August Invest EAA uses BlackRock Inc

In the now optimized framework we achieve full diversification, because of the use of multi-security index funds. Also, we achieve the highest risk-adjusted returns given our assumptions from the EAA model given the Markowitz algorithm. To support assumptions of future asset class returns in EAA, we rely to a very large extent on capital market assumptions of Blackrock Ltd. Classical variables as demographics, productivity and inflation all belong to a set of factors that theoretically and empirically determines future asset returns through structural impulses. These are the basis in BlackRock Inc and in August Invest Solutions.

Historical Risk and Return

The general portfolio profile of AIS US is subject to several sources of risk, including macroeconomic risk, geopolitical risk and climate risk. The portfolio has no currency risk beyond the indirect exposure in the underlying global ETF funds which amounts to negligible risk. All ETF funds have USD denomination. The last 10 years for which we analyze, have been a strong bull market in all assets, even government bonds. This is clear from the graph below,

In this chart, the Spring 2019 suggested AIS weights, is simulated with fixed current weights, including dividends, coupons and cost-charge. In this way we assume that we kicked off AIS US with its Spring 2019 weights in February 2009. The most (expected) risky portfolio, August Invest Opportune has delivered very high returns. In the other end, August Invest Safe has delivered relatively low returns. Both return patterns that do not surprise given the positive risk-return relationship that we normally consider as “rule of thumb”. Most striking is August Invest Green with lowest returns despite it actually having as high risk as Opportune. In a 120 months (10 years) summary table we have,

From the table it can be seen that the risk is not exactly equal to the target risk of each August Invest solution. The reason for this is that historical risk is not necessarily equivalent to expected risk, even with regular rebalancing. In the case of August Invest Green we expect 10% p.a. in risk although the historical risk is close to 13% p.a.

If we show the results in a risk-return diagram we clearly see the August Invest Green “anomaly”. Against other August products and against classical portfolio model combinations of Global Equity and Bonds. Please note that the diagram corresponds to the famous Mean-Variance (MV) diagram in finance. Except, that this is historical combinations of risk and return, and not as in the literature, expected risk and return

The first thing to note is that the 3 Low-Medium-High risk August Invest profiles constitute a line “north” of the line that can be visualized running through simple Equity/Bond benchmark (Benchmark) portfolios. This can be attributed to diversification and not costs as the benchmarks have identical cost-charge as the August Invest solutions.

Strong historical diversification

Higher return for same risk, of vice versa lower risk for same return. So, August Invest solutions work as it should according to Modern Portfolio Theory. Delivering higher risk-adjusted returns than even cost-equivalent portfolios. Still, August Invest Green falls off a very steep cliff. The “Green Technology” field has been and perhaps still is in its volatile infancy, and we don’t expect this continue. So, we are confident in offering this solution as a climate-friendly alternative to the traditional portfolios with a risk of 10% p.a.

August Invest Green falls off a cliff

Academically speaking, we don’t expect the “Green” product to be priced with such a low risk-reward. Although of course it can axiomally be argued that investors in “green” products accept lower return, relatively to an otherwise risk-equal asset.

In the following table, we describe in details the obtained annualized returns over the Morningstar standard horizons, 1Y, 3Y, 5Y and 10Y. Also, we provide the 10Y annualized standard error. We present data for August Invest and risk-equivalent Active Funds and Passive Funds from Robotized Platforms. Data are gross dividends, and net of cost-charge

In general, we see very high returns on all horizons which reflects the bull market since the aftermath of the Great Financial Crisis (GFC) in 2007-2009. We can visualize the risk-adjusted performance or return by applying the Sharpe Ratio. The strong performance of the traditional August Invest solutions appear in the top-3 ranking with ratios higher than 1. The primary driver behind the high general ranking of our solutions is the cost-charge structure.

Investment Cost-Charge (fees)

The low fee or cost structure of August Invest can be demonstrated by comparing to other index products that similarly to August Invest, include fund selection and optimization to a diversified but constrained portfolio. The cost difference is approximately 1% p.a. (Morningstar.com). The difference to the active fund is 2% p.a. (Morningstar.com).

The following chart illustration assumes an average fee of 0,25% p.a. across AIS US. Costs on more risky solutions in the AIS family is with the exception of August Invest Green lower. This is because it’s cheaper to ETF replicate equity portfolios than bond portfolios. The current expected cost of the “ready-for-trade” solution is stated in the PDF access file available on this site.

From the chart it is clear that traditional index investments through multi-asset funds directly or through so-called robotized investment platforms, are relatively expensive as investor pays for the two layers of fund selection and optimization. Both layers are included for FREE in the August Invest products. Although different in price, August products and other diversified index products share the same feature of having only exposure to future equilibrium returns in the economy. The structural economic core between supply and demand of capital, and hence the price of capital. Market returns.

Active Funds Charge 25% Of Market Return

Active funds on the contrary, include several dimensions of active overlays to capture risk and returns deviations from structural building blocks. DAA, TAA and SAA in different versions all aim to harvest time-varying (cyclical) risk premia, on the premise they are predictable. In the below table we summarize the USD impact of this cost difference in 10 years. We assume investor buys USD 100.000 today in each of the 3 portfolio types. The market gross return is 8%% p.a.

From the chart it is obvious that active management is incredibly expensive. The 3 active layers of DAA, TAA and SAA have a price tag of USD 43.000. The Robot Platform solution has a price of USD 20.000, while August Invest is merely USD 5.000

Investment allocation implementation, tax and UCITS

As with the general August Invest Solutions the potential flipside of the extreme cost-efficiency, is that Investmentexcel.com only delivers the portfolio solution or proposal. Investor is hence responsible for actual portfolio implementation via own trading account in a bank, or by simply E-mailing the product-attached PDF file to a personal contact person in the bank.
The PDF file is detailed and constitutes also a trading ticket (slip) that can be applied readily by investor or bank contact. The content of the trade ticket is identical to the trade ticket that an external bank portfolio manager would submit to the market.

In between rebalancing from investmentexcel.com the underlying funds of the solution pays out some dividends. Dividend payments will normally accrue to your cash account in your local currency. Dividends are subject to local tax laws as are of course any realized and unrealized asset values.
Investmentexcel.com is a gross (but after cost) return, as are most other distributors in the financial investment community. Any cash available stemming from dividends in-between rebalancing, can be reinvested according to the new rebalanced profile at the time of rebalancing. If you want to learn more about how to rebalance your portfolio see here.

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