Relative to absolute riskScalable Capital aims to provide institutional-level investing to the retail investor. Like older firms in the space (whose coat tails French says Scalable is lucky to be riding on), it uses exchange-traded funds (ETFs) to invest across all major asset classes. And like others, it currently requires a £5,000 minimum investment, with an all-in fee of 0.75 per cent per annum. “The first wave of financial technology changed the packaging. But the technology underneath was still the old technology, the old business processes that the financial industry has used since the ‘80s.” The Scalable team wanted to go beyond packaging and use technology to create a new product. “The traditional investment industry relies on ‘expertise’ and active management. We want to remove that. We know that technology can do so much better when it comes to money management than humans can because it’s unemotional, and millions of eventualities and processes can be simulated.” Scalable has built an algorithm which aims to do just this: draw data and model a complex world without having to make simplifications or assumptions – and without layers of people and process, which add cost. The firm calculates that a £100,000 investment, with a 6 per cent return, would yield £12,716 more than a traditional investment manager. Over 30 years, that’s £93,523. Rather than focus on building teams of operations or sales people, the bulk of Scalable’s 42-strong team are financial and software engineers. As an investor, rather than be put on a risk scale – a two for taking less risk, or a seven, say, if you’re willing to take more – Scalable uses a percentage scale to ascertain how much you’re willing to lose. So if you’re at 15 per cent, that’s the hit you’d be willing to take in a really bad year. “We want to move away from relative risk to absolute risk. We run simulations on an individual portfolio basis, so even if you’re in the same risk category as someone else, your portfolios might look different. You might have joined on different days, so certain trades would have made sense for one person but not the other.” French is confident the business will continue to personalise its approach, with plans to factor in things like how much tax someone is paying.
Using ETFs helps with this, he says. “Unlike in Germany, where they’ve been sold by banks as financial instruments, these are still a relatively new product in the UK in terms of how people think about them. But, when it comes to assets under management, they’re larger than hedge funds, and bring the best of both worlds: diversified holdings and traded on stock exchanges. Using them means real-time pricing and daily liquidity. We can get out of an instrument whenever we want and, because they’re passive in nature, we’re not paying a manager.” I ask why people can’t just go and buy ETFs themselves. French says the answer lies in convenience: “with 1,500 ETFs on the market in the UK alone, which should you invest in? That’s a problem 99.9 per cent of people don’t know how to solve. And even if you do make simplified assumptions and sit with a spreadsheet, that’s not what most people want to be doing.”