By Aman Raina, MBA, Sage Investors
Special to the Financial Independence Hub
With stock markets violently zigging and zagging during the month of August, I thought it would be a good time to check in with our ROBO Portfolio to see how it withstood the market gyrations. Here are some observations:
After being up 0.8 per cent year-to-date in July, the portfolio slipped into the red, dropping 2.93 per cent year-to-date. Every asset class in the portfolio was now in a loss position. The real estate and Emerging Markets components were the biggest laggards, posting -14.9 and -12.7 returns year-to-date. Given the meltdowns we saw in global equity markets, this isn’t much of a surprise.
What I found puzzling was that in the breakdown chart above, ROBO no longer shows the total portfolio return on its website. Below is the same breakdown in July.
So I had to calculate the -2.93 return myself. Even in the online statements, there is no reference to total portfolio performance. Not exactly the level of transparency that ROBO Services claim to offer.
Update: Since I wrote this I discovered the mobile app version from the Robo Service posts the portfolio return. Not sure why they post it there and not in their other platforms?
In my last update, I commented that, “…it appears the portfolio is overweight US stocks and underweight Emerging Markets, Canadian, and Real Estate components. It will be interesting to see if the ROBO follows up on rebalancing these components in the following quarters. The premise here is that ROBO shouldn’t care about market dynamics and variables (e.g. Greece leaving the Euro, China stocks crashing, a white hot Canadian real estate market, or when the Federal Reserve will increase interest rates). It should methodically and unemotionally reallocate…” Since the last time we checked in on the portfolio in July, there have been some noticeable changes in the asset allocation taken by ROBO:
- Removed the Risk Managed Stocks allocation and separated the Bond allocation into Corporate and Government Bonds allocations. Bond allocation remained at 15%
- Increased allocation to US Stocks from 15% to 20%
- Increased allocation to Emerging Market Stocks from 10% to 12.5%
- Increased allocation to Foreign Stocks from 15% to 17.5%
- It appears the allocation change was made on August 25th if we follow the transactions that were made since July, which are listed below. A lot of damage was done in the markets by then.
My portfolio asset allocation has now changed to the following:
The second significant change involved the complete removal of the Risk Managed Stocks allocation via the sale of the Purpose Tactical Hedge Fund (PHE.B). When the Robo portfolio was setup, the Robo established the rationale for this ETF was to “…Use a momentum-based strategy designed to protect investors against big market downturns. Performed very well in 2008 market crash.” It’s interesting that after going through a meaningful pullback that Robo decided to pull out of the fund.
The other significant change in the portfolio was the reorganization of the Bond allocation through the sale of the Purpose Tactical Bond fund (PBD) and the purchase of the BMO Short Term Bond ETF (ZCS) and the BMO Mid Federal Bond ETF (ZFM). When I first peaked under the hood of my portfolio, I was surprised to see what appeared to be a fund of funds product in a online portfolio and wondered if it would have been more effective to just invest in the respective ETF’s. It appears that ROBO must have read my article!
Since setting up the account, I haven’t received any “human” contact from my Robo advisor or any representative from the Robo company, other than some periodic emails with links to some blog posts on their website and some brief commentaries. During the August stock market pullback, I did receive an email from the firm suggesting that clients should not get to emotional and make panic type decisions. No surprise for me. I wasn’t expecting too much. The model pretty much is set up for clients to initiate the conversation, which is no different from a Do-It-Yourself or discount brokerage type of account.
One of the tenets of passive investing involves keeping transactions to a minimum to save on fees and also keeping true to original allocations. I am a bit surprised to see that in the first eight months of using the service that the ROBO has made a significant change in the asset allocation of the portfolio and has also turned over almost a quarter of the asset types within the portfolio. Not exactly passive investing if you ask me!
In addition, it appears that the decision to change the portfolio weightings was more a reaction to the market pullback rather than a strategic move consistent with an investment objective. I have nothing that can verify this other than when the transactions took place, however the optics are a bit curious. At the same time I do like that ROBO has removed what I felt was some overlap and duplication with the Purpose Risk Managed ETF and taken that allocation and put it towards more passive and cheaper index funds.
A new feature from my ROBO service is for each security owned, there is now a link to a reference page which provides more detail on the ETF within my portfolio and more importantly, there is a section that provides the ROBO’s rationale for selecting the ETF. I think this is good for investors. Here is a sample below:
Again, the purpose of this exercise is to observe the actions and behaviour of an online/algorithm based portfolio. I’ll sound like a broken record here when I say it is still way too early for me to pronounce judgement on this type of model. So far though, there are some green shoots that are forcing me to take pause.
Aman Raina, MBA is an Investment Coach and founder of Sage Investors, an independent practice specializing in investment coaching and portfolio analysis services.