How it works advanced

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Ubanking general

a. Legal ownership

Ubanking.dk (Ubanking henceforth), is a tool or product offered by legal Danish entity, Ubanking ApS. Ubanking ApS also owns www.formuetesten.dk and www.pensionsvejen.dk (01.12.20). Ubanking ApS is 100% owned by CEO, Author, MSc in Finance and Cand.Oecon Thomas Peter Clausen (see more on About Us).

b. History

Ubanking ApS is a legal succession of the likewise digital investment company, Investmentexcel.com PS, that operated from 2018-2020 as substantially a pilot project. A pilot projecting testing global market demand for online global investment solutions. Investmentexcel.com PS, operated the site www.investmentexcel.com that will discontinue in its updates and functionalities gradually from 2020-2021.

c. Financial license

Ubanking ApS is not a bank, and nor is it an advisory company, hence is not required to be legally monitored by local FSA, Finanstilsynet. Ubanking merely produces suggested investment solutions, that Users can either accept or reject. All responsibility is on User. 

d. Membership and digital investment banking?

Membership-based digital investment banking is a rapidly growing business around the world. A major driving vehicle is the Fintech industry and it’s development of User-friendly, cheap and transparent analytical and monitoring solutions for portfolios and markets. Investment Banking thus changes fast these years following the decade-long transformation on the financing side. Loans. But the digital investment innovation is still in it’s infancy and mostly relating to individual stocks. 

The business for digital Stock investment banking is actually already a big and established industry. It works like this. User, the member of a community (site), subscribes on an ongoing basis to an online analytical model or trusted person or group, that regularly suggests individual stocks to either buy or sell. Based most often on Technical Analysis (TA) but also Fundamental Analysis (FA). 

The digital industry for more advanced global investment solutions with asset classes, currency, stocks etc. is however, for many reasons, very new. Among those reasons is probably that it requires somewhat more complementary analytical power from academics and market professionals and maybe lack of demand. 

Ubanking is exactly that. Multi-asset class global investments.  But, not only is it a multi-asset class investment framework, it is also designed to encompass investors from individual regions. So, an Indian User gets suggested another portfolio than a Swedish User. Despite same risk profile and expectations.  

e. The core idea – objective and philosophy

Essentially, Ubanking is a membership-based wealth management company, to which Users (members) don’t transfer any money or portfolio as with regular banks. As member in Ubanking, User merely has outlay for the membership, essentially leaving User with no risk on Ubanking. Yet, still User gets professional portfolio and wealth planning solutions. It’s just not driven directly by the expensive hands of a human bank employees sitting in physical bank domiciles. It’s in the hands of a Robot, already created by academics and professionals in financial markets.  

In a flow-based configuration, User ultimately downloads professional and tailored investment solutions. A trade-ticket, just ready to execute. A piece of digital investment software, made readily available for investors looking for access to cheap, flexible, objective and professional financial investments on the global market place.

On top of this, Users will receive a notification, a Newsletter, whenever Ubanking changes or recalibrates the designed optimal investment framework. Only paid Users can access trading details. So, Ubanking is much more than a one-time optimization of User’s portfolio or wealth plan. Ubanking is a digital asset manager that can even be manually User-driven.  

Behind the curtain is the Ubanking framework which is composed of a complex set of scientific building blocks, that fortunately stay safely behind the curtains of the User accessible and visible platform. These building blocks together, also constitute the “Ubanking Robot” that guides manual User modifications in portfolio constructions.

The general idea with the platform is therefore for Users to easily and intuitively get, create, modify and trade financial portfolios, without relying on expensive and subjective advice from banks. All portfolio calibrations are carried out based on the market’s own objective expectations.   

As a member, User more specifically gets access to four basic standard investments solutions and analysis. All solutions, dynamically and optimally created, within an investment universe of cheapest global Investment Funds (normally ETF’s). These standard solutions are frequently recalibrated and optimized to adapt to changing market cyclical and structural conditions. 

The big innovation in Ubanking, however is the “Portal”. The Portal follows the flow-structure as a natural ending point, where User can become her own professional manager and modify core financial assumptions, and dynamically view the impact on portfolio and future wealth plan. When turning on the Portal as manual, User naturally deviates from objective assumptions. 

The autopilot in the system takes the market way. However, that might of course be wrong, and perhaps leave User with the ideal flight. For her. Many private investors are not so obsessed with risk-adjusted returns as professionals and of course as in Ubanking. If she prefers just higher returns then the Robot can help in building the best-possible portfolio given just that.

f. Trading and custody

Ubanking is not a trading platform, nor is it a portfolio holding or custody service. A such, User has to keep portfolios and trade all investment suggestions via her usual platforms or banks. Ubanking is a stand-alone investment software, not unlike those used in professional bank wealth management.

Investment framework and universe

a. Investment Framework and policy

At any time, the Ubanking system comprises one (1) global multi-asset class model portfolio with also local User country presence in Equity. A general model portfolio that can only be accessed and modified by an Ubanking administrator. From this model, individual User solutions are scaled and defined. 

The model portfolio is constructed from a set of global asset class exchange-traded products mirroring best-possible global economy and asset returns. User will always have minimum one local fund representing her country. So, an Indian member, will also in her portfolio find a Fund capturing the Indian economy (e.g. Fund on Sensex). 

Financial and statistical theory suggest that capturing economy and asset returns must be done in a 100% diversified way and with fewest costs. This explains Ubanking’s application of a set of low-cost Funds.

These will normally be factor-neutral funds, but can be factor as well (e.g. Small-Cap). Mostly in the ETF space.

 

The investment approach follows the academically recommended strategy of being relatively inactive through general cycle fluctuations. All gains (and loss) are gross return zero-sum and leaves investor with a net trading cost loss. 

 

The model portfolio is dynamically recalibrated based on trend variation, but also on cyclical variation. Ubanking, however does not engage in valuation or other relative value metrics known from classical active trading.  

 


Governing trend changes, are structural and objective inputs on risk and return from BlackRock Inc., ECB and IMF. Essentially, this implies that any long-term input and output of the economic engine, are of equilibrium nature. These changes are not that common, but for sure more common than textbooks traditionally argue. 

 

 

Current economic environment and decision making in global economy and monetary policy, warrant some (if not high) degree of flexibility in any investment process. When policy makers today discuss inflationary frameworks, or Modern Monetary Policy (MMT), founded in cyclical debt, inflation and growth challenges, they touch on long-term mechanisms, like risk-premia. Risk-premia is the key capital or portfolio allocation source.

 

More frequent cyclically-driven changes stem from Ubanking’s subjective “risk on/of” assessment. So, to counter flexibly e.g. the Corona market collapse, Ubanking has defined a tolerance risk band around the target risks from the objective trend risk (see chart next section). A bit popular one could argue UB is long-term passive and short-term active. This sounds like active investment, but it is not. Short-term changes are driven by change in UB risk appetite and not valuation or sentiment.

 

Bottom line. Ubanking implements two levels of investments of active decision-making. One that’s called “trend” and another that is called “cyclical”. Compared to other classical investment processes in banking, at least one level has been cut-off. The “trend” allocation is the Strategical Asset Allocation (SAA), whilst the “cyclical” allocation is the Tactical Asset Allocation (TAA). Normally the SAA moves around an Equilibrium Asset Allocation (EAA) called a benchmark. SAA IS the benchmark and IS the EAA in Ubanking.

b. Tradeable investment products

User can expect 4-6 100% asset class diversified investment funds. Typically, but not always, low-cost passive ETF’s from BlackRock Inc. User will always have minimum 1 local Fund representing her country. So, an Indian User, will also find a Fund capturing the Indian economy (e.g. Fund on Sensex). 

All Funds, passive or active, are selected carefully from a 2-pillar screening approach. All Funds must be tradeable on a cheap global trading platform. We use currently using www.saxobank.com as global platform and also www.nordnet.dk in the Nordics. 

From the second pillar we use a weighted parameter approach, in which yearly cost, UCITS eligibility and liquidity are most critical. Ubanking does not address any tax considerations. All results are gross tax, but net of TER costs (but ÅOP in Nordics). Consequently, the screening process is indifferent between accumulative (ACC) and distributing (D) Funds.  

c. The digital flow towards investment solution

User selects her nationality (region), and subsequently enters a flow which 3-stepwisely builds User’s risk preferences and profile. On this basis (e.g. profile 1) a “default” global low-risk investment portfolio now appears, with full analysis in the User-Portal. In here User can readily go to Trade-View (and mail execution), which includes all required financial instruments (Funds). 

 

However, User can also before mail execution, choose to modify the default portfolio, with own subjective assumptions and then revisit the Trade-View. Last, User can at any time in the Portal, reset the portfolio to either 1-4 of default optimal profiles in the system. From User’s entry on the site to an exit with a fully described, scenario tested, tradeable and E-mailed portfolio, it will take 30 seconds.

d. System-driven solutions (auto management)

Ubanking has a database, with updated core assumptions crucial for the microeconomic and macroeconomic engine governing all portfolio output calibrations. We use objective input from academic research, BlackRock, ECB and IMF on risk and returns for asset classes and individual asset risk-return averages.

 

Substantially, the system dynamically forms 4 user-available multi-asset class optimal portfolios based on 4 risk levels. From low to very high. “Ubanking Safe”, “Ubanking balanced”, “Ubanking Opportune” and “Ubanking Super Opportune”. In the table, the strategy or trend target weights are pictured. Risk is measured by annual standard deviation.

All solutions calibrated from the objective engine, but with an important restriction on country home-bias and currency. E.g. this implies an Indian investor in Ubanking, will see a relatively high weight of Indian stocks in the solutions. We know from research investors generally appreciate local stocks relatively (versus GDP) over global stocks.

When User is on “auto”, meaning working actively with either of the pre-defined 4 User models, the portfolio allocation between equities and bonds and between countries, will be founded on a strategical trend approach. An approach that defines allocation from objective building blocks of risk and return in the Ubanking investment universe of funds.

e. User-driven solutions (manual management)

As described above the system works as a short flow into the Portal. In the Portal User has several manual options to modify the default system portfolio profile. Most important is the option to deactivate the entire bond universe in the configuration of the User profile (see below). Other variables are weights on equity asset classes, alpha, GRI and asset class weights. 

 

If User also wants to include a set of individual stocks, this can also be done as well as User can define an excess-return if she believes a given stock will outsmart the general market. The system does not operate with stocks names (like Apple or Microsoft) as this will not change anything. Only USER subjective stock features of risk and return matter.   

 

If User goes on “manual” she will possibly deviate from those 4 optimal paths set out by the Ubanking models. This happens immediately if e.g. deactivating bonds. In a classical exposition of optimization of portfolios, this off-tracking will happen also with any changes in risk and return from those we assume are objectively “correct”. However, Ubanking sets hard restrictions on the model portfolio weight as a comprise between financial intuition and User application.  

f. Investment diagram

The investment approach is probably best described by a chart that differentiates between long-term and short-term. Target trend weights are defined implicitly via the equilibrium formation on the linear microeconomic relationship between expected risk and return. The CAPM. 

 

Measured by the light-green line, “Ubanking Safe” has flexibility to go 100% cash with risk 0%. “Ubanking Super Opportune” is constrained in the upper-end as maximum 98% can be allocated to a portfolio of highest risk (at any time). When Ubanking makes short-term changes on the model portfolio and hence in the 4 User portfolios, all results, we say, are still in equilibria. Ubanking solutions just moves on the CAPM, which has 0% excess-returns from any skills among money managers or asset. 

 

Where is the model portfolio? The trend line IS the model portfolio, or at least a scaling of it as the slope on the line is defined by the ex-ante Sharpe Ratio on the Ubanking model portfolio. Note the trend line can move with changes in equilibrium “CAM” assumptions from BlackRock Inc.

g. Investment horizon and risk-scaleability

The “financial engineering” shapes the core global model portfolio’s risk and return in a state of equilibrium. What this means is that no matter the choice of horizon the expected return p.a. is still the same. Now, e.g. its 6% p.a. on a broad US stock market in USD. 

 

When we calculate risk over time, we assume normally distributed log-returns, to achieve zero-correlation assumption over time (implies square-root scaling). This also implies that User’s expected portfolio wealth in money at a given time in the future, is represented by a lognormal (AM-GM adjusted) distribution. All tail-risk scenarios in Ubanking is hence estimated by a lognormal distribution of wealth at a given point in the future.

h. Headline risks

We need her to separate between the 4 standardized and optimal solutions that User always can download, and the User customized manual solutions. Ubanking dynamically fine-tunes 4 low to high risk profiles, that constitute a set of default portfolios User at any time can select. 

 

With risk measured by standard deviation p.a. from 5% to 15%, those 4 default portfolios comprise the relevant section of the diversified risk spectrum. The low-risk portfolio is approximate 75/25 bond/equity and the very-high risk portfolio is a 100% equity risk portfolio. In the flow User can view core settings of all 4 models before entering the Portal. 

 

The risk portfolios are also designed to reflect User’s home country. A small-country investor like a Dane, as such, will see a structure with a relatively large share of Danish equities via a OMXC traded Fund solution. In case User decides to deviate from the optimal default solution (“auto”) he goes on “manual”, and in some cases no longer navigates risk-return optimally. 

 

But he navigates according to his own preferences, which might be no bonds no matter what. He might also choose to include just 1 stock in his portfolio, Apple Inc, which he believes will return 100% in 1 month with hardly any risk associated. In other word with “manual” on, portfolios can have all combinations between, cash, bonds, Funds and stocks. 

i. Currency (FX) risks

We can only answer, on behalf of the 4 default solutions. These are calibrated from a set of carefully screened investment Funds. In that screening process, currency risk is taken somewhat into account. But it’s a balanced approach with several parameters in Fund selection. Our economic models are equilibrium models, which implies currency changes has no effect, as any expected change in e.g. EUR/USD is already reflected in the asset class return differential. However, we still try to close the huge global investment USD risk down in hedged Funds to enhance transparency ex-post for investors.  

j. Bonds risks – negative return

Bonds are critical in building portfolios. But, with zero rates or even negative rates, professionals have a hard time to access whether bonds should be in a multi-asset portfolio at all. Only reason is left is negative correlation to other asset classes. But the return weighs a lot, and correlations could be much less “good” in the future. We know from research that private investors generally dislike bonds. We can only guess how much they dislike them now at negative nominal and real rates. So, in Ubanking User has the optionality to deactivate an otherwise activated default bond part in the portfolios.

k. ESG risks

ESG screening of investments (Funds) is more or less standard today in professional financial institutions. Often the screening is carried out on the Fund level. So, BlackRock Inc. as the world-largest distributor of index ETF Funds has ESG screening as part of the underlying portfolio instrument selection. If a Funds holds 100% “Green Windmill” stocks it’s probably 100% ESG compliant and “awarded” highest ESG rating. As a multi-asset Fund manager Ubanking ApS needs to consider whether all Funds in the Ubanking investment universe should have an individual minimum threshold ESG rating or the total risk portfolios should have minimum average ESG rating. 

 

Ubanking ApS has decided to exclude any formal ESG rating thresholds. This does not imply Ubanking cannot have ESG screened Funds. No, it merely implies Ubanking in its construction of portfolios, will not have yet another hard constraint. A constraint our experts expect to have a detrimental spill-over to risk-return. ESG, however sneaks into all industries fast, so we are confident in saying that we still adhere to ESG, even though Ubanking does not follow a rule-based ESG construction.

l. Other asset classes

Ubanking has a global investment universe. From Denmark to Emerging Market. The multi-asset class universe is flexible in the sense it adjusts to dynamically increase the probability of harvesting global risk-adjusted return at the lowest cost. User can always deactivate asset classes according to User subjective preferences. The software however, is a special case, as non-equity but risky asset classes like commodities, go into the main equity group. The cash part is always set 2%.

m. Individual stocks

Ubanking is an equilibrium based financial solution. So, it assumes stocks are priced according to the CAPM. No alpha. Only beta scale. Ubanking further assumes the stock is an average stock with beta 1 and average stand-alone risk on stocks in the market analyzed. In Denmark the stand-alone risk is 32% p.a. If User types in 10 individual stocks, portfolio risk is scaled according to a basket of 10 stocks with 10% weight each, and with an assumed intra-stock correlation (normally 0,25). User however can choose to add an “alpha” if she believes that exactly her stock will be a “winner” or “looser” stock over a horizon. That alpha must include an extra beta return if the stock has a significant from 1 beta.

Trading and rebalancing

a. Trading procedure

In Ubanking (version 1), User cannot activate a trade link to a trade platform and execute on-the-fly. From the Trade View or via the E-mail, User must go to existing platforms to trade. The usual way, just with a smart ticket in hand. 

b. Assistance in trading

User can always book virtual meeting with one of our (human) experts on www.pensionsvejen/bookexperts (from 01.12.20). Alternatively, in the ecommerce Academy window, videos and Excel sheets can be downloaded to support.

c. Rebalancing versus recalibration

Ubanking models are not rebalanced. They are fixed weight “benchmark” profiles. User should rebalance herself against this profile. There is no rule or formula for when that should be done, but in practice it’s not an issue as Ubanking makes regular recalibration.

When Ubanking changes the weights it’s always a recalibration of the 4 User models. This change is then sent out to all Users by Newsletter. User must then rebalance her LIVE actual portfolio accordingly, by going to Ubanking.dk and get a new updated (model) portfolio, which e.g. could say sale 10% of ETF Fund1 and buy 10% of ETF Fund2. If User has a problem by rebalancing then visit the Academy or go to  www.pensionsvejen/bookexperts (from 01.12.20).

d. Frequency of recalibration

The model portfolio is regularly changed with regards to asset weights, and with regards to Funds. We update minimum 4 times a year. All updates will be stated in the monthly Newsletter. Whether User should rebalance according to changes every time, is not in the hands of Ubanking to decide. It’s also a matter of trading cost and for that matter, mood. But changes reflect the gravity pull or push to the Ubanking long-term optimal risk-return path. So, Ubanking is more than a one-off change by portfolio. Ubanking is a personal asset manager.

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