The performance of robo-advisors during the tumultuous first quarter was a lot like the performance of overall markets: Socially responsible investing portfolios tended to perform better than non-SRI portfolios compared to their benchmarks, as did portfolios that stressed high-quality corporate bonds and Treasuries over high-yield and emerging market bonds, according to the first-quarter Robo Report.
In addition, portfolios that were neutral on the growth/value spectrum did a lot better than those that stressed value when compared to their benchmarks.
The top performer for total portfolio for the first quarter, however, was a relative newcomer, Titan Invest, which, unlike most robo-advisors, has an actively managed portfolio. More specifically, its portfolio of about 20 stocks is hedged with a short position in the overall equity market, a “personalized hedge” that’s based on an investor’s personalized risk tolerance. The short position helped Titan place first for best equity portfolio in the first quarter despite its relatively high 1% fee.
Wealthsimple and Wealthsimple SRI took second and third place, respectively, for overall portfolios in the first quarter.
Wealthsimple also shined in the longer term. Its traditional portfolio placed first in the fixed income category for one and two years through the first quarter, supported by heavy weightings in long-duration Treasury bonds, according to the Robo Report. Its SRI portfolio took first place for total portfolio for one and two-year trailing periods, reflecting the longer-term outperformance of the category.
SRI portfolios occupied four of the nine best performance slots — first, second and third place for total portfolio, equity portfolio and fixed income portfolio — over the trailing one and two years, according to the Robo Report. In addition to Wealthsimple SRI, those portfolios include Morgan Stanley SRI.
A key reason for that outperformance: SRI portfolios don’t have a value tilt in their equity holdings, which many robo-advisors have, according to David Goldstone, head of research at Backend Benchmarking, which publishes The Robo Report. Value stocks have underperformed growth stocks for much of the bull market that ended this year, including the last three years, explained Goldstone.
“Over the three year trailing period ending on March 31, there are few notable trends: Large-cap stocks significantly outperformed small-caps, domestic stocks outpaced international and growth performed significantly better than value,” said Goldstone, in a statement.
Importance of Low Fees
Low fees were also a key determinant of outperformance for robo-advisors over the past three years during which SigFig, Fidelity Go and Axos Invest (formerly WiseBanyan), took first, second and third place.
Axos doesn’t charge a fee for its basic package; SigFig doesn’t charge for the first $10,000, and Fidelity Go has an all-in 35 basis point fee but uses Fidelity Flex Funds, which don’t charge any fund expense ratios. Vanguard has introduced Digital Advisor, which charges an all-in cost of 20 basis points and is currently being offered in an expanded pilot program.
“Razor-thin margins and pricing competition will continue among robo advisors, increasing pressure on traditional advice,” according to the Robo Report.
An Evolving Model
Looking ahead, Goldstone expects independent robo-advisors will continue to evolve toward comprehensive personal financial platforms that can serve as a one-stop destination to handle all aspects of one’s financial life, from investing to saving as well as budgeting and retirement income.
Beyond the relatively high-yielding FDIC savings accounts that some already offer, sometimes along with a checking account, will be budgeting tools that can help investors save automatically while providing long-term planning for saving and budgeting. Wealthfront, one of the leading independent robo-advisors, is developing a Smart-Driving Money product following its acquisition of Grove last year.
Schwab is offering its Intelligent Income option that provides retirees with a “tax-smart approach” to withdrawing funds from different retirement accounts along with an automatic rebalancing feature.
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