Aman Raina’s Robo portfolio — 2 years later

Aman Raina

By Aman Raina, Sage Investors

Two years ago I decided to set up an account with an online wealth management company that manages portfolios using algorithms and computer code. At the time, these Robo Advisers were just getting out there but there was a fair bit of buzz on how they could threaten traditional wealth management services.
I was intrigued by the model, but there was one thing that many marketing materials, blogs, and mainstream media was avoiding … do these things make money for investors?

 

I was having a hard finding an answer to this so I decided to try to find out myself.  I set up an account with one of the big Robo Adviser firms. My goal was to go through the process and blog about my experience and more importantly, the results. We’ve now crossed the two-year anniversary of my ROBO account, so let’s take a look at how it’s doing now.

When we last checked in with our ROBO portfolio in January it was taking some hits along with the overall stock market. Since then the market has recovered quite nicely. Let’s take a look under the hood to see if the Robo Portfolio has bounced back.

Performance

1 year performance of my ROBO portfolio

1 year performance of my ROBO portfolio

After the first year, the ROBO had lost 2.15 per cent. It had a rough year, but in year 2, ROBO picked up its game. The portfolio generated a 13.2 per cent return for the year. The portfolio went up a total of $638.49, of which $142.19 was in dividend income with the remaining $496.30 earned through capital appreciation.  Much better job.

If we go back to when I set up the account two-years ago, the portfolio is up 9.5 per cent. The ROBO  portfolio is making money. Below is the breakdown of the portfolio. When I set up the account I answered a series of questions about my financial literacy and risk tolerance. ROBO took my responses and crafted a portfolio that it felt reflected my profile.

As I am pretty experienced with investing and have a long-term investment horizon, ROBO determined that a portfolio mix of 85 per cent stocks and 15 per cent bonds would work for me. From there ROBO carved out allocations to a variety of equity assets using ETFs to provide the appropriate exposure.

After starting off 2016 in a funk, ROBO really upped its game as the year wore on

After starting off 2016 in a funk, ROBO really upped its game as the year wore on

Back in January 2016, almost every asset class was losing money. Now we’re seeing some more green. The Real Estate asset class which was down almost 15 per cent last January is now down 6.8 per cent. The dividend ETF that was down 5.4 per cent last January is now up 7.1 per cent. The Canadian ETF that was tanking last January as oil and commodity prices were free falling is now back up in the green, up 5.1 per cent, as oil and commodities rebounded. It appears the ETFs have been participating in the rebound over the year as major indexes were shattering records on an almost daily basis despite several starts and stops during the year (China stock market crash, BREXIT, and Trump), which is what we want to see.

Asset Allocation

ROBO has kept the asset allocation pretty much in check over the year. In some cases such as the US portion, there is a slight overweighting while the bond ETFs and Foreign Stocks remains slightly underweight. I’m a little surprised that ROBO hasn’t rebalanced them accordingly in a timely fashion. I wonder why it is waiting or is somebody making them wait?

Over the past year, ROBO did not sell any positions. Unlike the first year where there was a fair bit of churn, ROBO has been very disciplined in terms of maintaining asset weightings and tweaking them at the margins.

Fees

ROBO is much more transparent in terms of fees it charges itself as well as the fees the individual ETF’s charge, which is good to see. For 2016 it appears I paid grand total of $10.84 in fees to the ROBO  or 0.20% of the total assets and individual ETFs, which represents approximately 0.22%. So that’s a total cost of 0.42% of the portfolio, which is pretty good; however, because I’m investing the minimum $5,000 I’m not really getting dinged much by the ROBO as there are no fees on the first $5,000.

If I were investing $25,000 you would add another 0.5 per cent, which would kick the costs up closer to one per cent. Either way, the fees are much less than what you would pay for a portfolio of mutual funds, which is nice to see.  I also noticed some of the MERs in the ETFs went down, specifically the IEFA (0.08 from 0.12), the Purpose ETFs like the PDF (0.38 from 0.55), and PHR (0.45 from 0.65). Interestingly the XIC went up 1 bp to 6bp.

I guess the big question for me is and it really applies to all rob advisers:  how do they make money? If they’re getting only $10.84 out of me, where can they generate significant margin to justify the business model? Right now there doesn’t seem to be a critical mass of capital and even if all that money invested in actively managed mutual funds were to port over to a robo adviser type service, the returns can’t be that spectacular. Someone will have to explain this to me. I wonder how long my ROBO can survive? We just don’t know how people will behave if the market pulls back violently. Will investors pull money out of robo advisers? We just don’t know right now because there isn’t much history to this business model.

Other observations: Waiting for human

My only correspondences with my ROBO throughout the year continue to be in email format, often to notify me that my statements are online, or pointing me to some interesting investing articles and profiles. When the markets were behaving badly, I would get a Keep Calm email and that everything will work out.

Since January 2015 when I set up the account and had to speak to an adviser, I haven’t spoken to a human being since. I’m not really bothered by it. It’s what I’ve come to expect in this type of platform. If you are a person who needs that human contact or sounding board this could prove hard for you.

It was a quiet but profitable year and I’m OK with that. Not much change in the portfolio. I’m fully invested in the market and I’m making a decent return. Beyond that there isn’t much else I’m seeking. As long as I’m making money and my costs are low, it’s all good.

Finally: Some disclosure on performance

One of my big issues with the online wealth management model is the lack of disclosure on performance. The key fundamental questions that doesn’t seem to be asked is whether Robo Advisers are more effective in generating positive returns compared to a traditional portfolio management model. Can you make money?  Clearly, after this past year the answer is yes; however, can a Robo Adviser grow your savings meaningfully and consistently over a long period of time? We just don’t know.

For awhile it felt like I was the only one asking this question in my blog and Stock Talk posts about performance and whenever I would ask anyone this question, I would get these weird looks. Well it seems we’re slowly getting some answers from the Robo firms … but in small baby size spoons. Much to my surprise my ROBO actually posted a chart with historical returns of its various portfolios. Here it is:

My ROBO's historical returns versus a "traditional investor". Notice the ROBO consistently outperforms the "traditional investor". There's a reason which I discuss below. PS-ROBO forgets to spell check sometimes :)

 

My ROBO’s historical returns versus a “traditional investor.” Notice the ROBO consistently outperforms the “traditional investor.” There’s a reason, which I discuss below. PS: ROBO forgets to spell check sometimes 🙂

I appreciate the effort; however. there are a few questions. Does this “Growth” risk level reflect my own portfolio (85/15 stocks/bonds) or is it for a different type of portfolio? Oh wait, ROBO has got the answer for me:

The portfolio my ROBO is using for its performance metrics is pretty close to my portfolio but not totally.

The portfolio my ROBO is using for its performance metrics is pretty close to my portfolio but not totally.

It’s close but this model Growth portfolio has a 20 per cent weighting  compared to my own portfolio, which is 15 per cent weighted to bonds. Also the Foreign Stock allocation in this model portfolio is at 15 per cent compared to my portfolio, which is 17.5 per cent. So it is not exactly an apples to apples comparison. Again I appreciate the effort in trying to be more forthcoming.

Next, who are these “traditional investors” that they are benchmarking to? Well, they appear to be investors who have a similar asset allocation but instead of using ETFs are using mutual funds that carry a higher cost. In the case of my ROBO their cost is 0.7 per cent versus 2 per cent for a traditional mutual fund. So in that graph above you’ll notice that the “traditional investor” never outperforms the ROBO and it is basically because of the higher cost.

More performance data

One year does not make a trend or say anything conclusive, however to finally have actual performance data makes the conversation much more meaningful than looking at font sizes at various online questionnaires.

 

One year does not make a trend or say anything conclusive; however, to finally have actual performance data makes the conversation much more meaningful than looking at font sizes at various online questionnaires.

There are other people asking similar questions and trying to answer them. In the U.S. a financial consulting firm Condor Capital opened a dozen accounts with various American online wealth management firms to measure and compare returns. After one year of performance in eight firms, the returns ranged from 10.75 per cent at Charles Schwab to 5.55 at Vanguard’s robo adviser service.

Wait: doesn’t Vanguard have the cheapest ETFs out there and yet their own service is generating among the lowest returns? Interesting. What’s even more interesting in the report is that even though all the portfolios have a similar 60/40 stocks/bonds asset mix, the strategies incorporated were different. This is key when evaluating ROBO firms. They do not necessarily have similar investment strategies and ideologies. You really need to drill down and ask questions to understand what is truly under the ROBO’s hood.

Any conclusions yet?

Having said that, two years of investment activity does not provide enough history to show that this type of investing approach is lucrative. I’m not ready to pound the table for ROBO advisers. We still need to see at least another three or so years of performance, and also a meaningful market pullback instead of the starts and stop to see how these portfolios behave.

We just don’t know right now. These portfolios are not battle tested, and more importantly, investors using robo advisers may not be battle tested. How disciplined will they be? I’ll be continuing the journey with my ROBO and I will continue to blog out how it’s evolving as well as my overall impressions and experience. Our robo adviser journey continues.

Aman Raina, MBA is an Investment Coach and founder of Sage Investors, an independent practice specializing in investment coaching and portfolio analysis services. This blog was originally published on his website on February 16th and is reproduced  here with permission.

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