Editor's Comment: DIY bespoke portfolios will soon be a convenient reality

As final salary pensions decline over the coming decades, growing numbers of people are likely to be taking income from an investment portfolio in retirement. While Money Observer readers will relish the challenge of running such a portfolio themselves, many others will turn to a third party such as a traditional wealth manager or, more probably, a low-cost online robo adviser.

Online wealth management services are still rapidly evolving, and that process will continue apace as technology gets smarter. It raises the question of what an ideal online investment manager might look like down the line, if one could start from first principles, designing with a mainstream consumer market in mind.

A few characteristics spring to mind. Ease of use is crucial, so any contender would need a simple, user-friendly website. It would be able, somehow, to ask ‘smart’ questions to assess clients’ real tolerance for risk, as it is notoriously difficult for people to judge their own capacity to deal comfortably with short-term loss. It would create portfolios from the full universe of retail investments, both actively managed and passive. Importantly, it would then take care of the ongoing management of portfolios in such a way that, even in the face of a market crash, clients could be confident of effective damage limitation. Finally, it would be cheap and transparent, with no hidden additional fees.

A robo adviser of sorts

However, a recent meeting with a new enterprise called Exo Investing, due to launch later this year, made me realise that technological innovations are busy pushing current boundaries a whole lot further than I could have imagined. Exo is still, in many respects, a robo adviser of sorts – you still have to assess your own risk tolerance, for instance – but there are several ways in which it distinguishes itself. It’s targeting DIY investors who like the idea of ‘controlling’ their portfolio but are fazed by the sheer range of products out there. Control, in this context, amounts to being able to specify more precisely which assets you’d like to be invested in, rather than being shoehorned into an off-the-shelf model portfolio by a robo adviser.

So, for example, you might decide you’d like a piece of the emerging markets action but want to avoid tobacco stocks. In effect, you create your own bespoke asset allocation by turning on/off or ‘favouriting’ particular asset classes, sectors or geographies; from that, the algorithm creates an optimised portfolio, selecting from the 600 or so exchange traded funds (ETFs) available on the platform. There are, I am told, two billion possible portfolio combinations from this lot alone, and Exo has plans to add shares and other products in due course.

Particularly interesting, especially for relatively disengaged investors, is the fact that the algorithm then just gets on with the job. The technology continuously assesses your portfolio against current market conditions to get the best returns for your risk profile, tweaking the weighting or selecting a different ETFs if necessary. If the market nosedived you’d probably take a small hit, but you’d sidestep the worst of the carnage, and you’d be exposed to subsequent rallies.

A business model based on limitless rebalancing is only sustainable if you’re not paying per trade. In this case clients pay a 0.75 per cent flat fee (0.5 per cent for portfolios of £100,000 plus), plus the underlying ETF fees, typically around 0.25 per cent. It’s not the cheapest, but as Boring Money recently observed in its assessment of the UK robo adviser industry, at this stage in the rapidly evolving robo story, anything below 1 per cent amounts to ‘fair value’.

By definition, a portfolio service based on index trackers is never going to do better than the markets it follows. The best it can do is to efficiently capture the upside and minimise the downside on behalf of investors – and in many markets high-quality active management will still have the capacity to add extra value over the longer term. Recent figures from Fundscape’s ‘Great British Wealth-Off ’ cast an interesting light on that argument. This ongoing experiment – comparing returns from five different investments (a robot adviser, an active fund, two active multi-asset funds and a passive fund of funds, plus active and passive portfolios put together by Fundscape) was started in February to try and demonstrate that different types of investment can produce pretty similar outcomes. These are early days, but so far it’s not a convincing hypothesis.

Over the first six months, the performance table was dominated by active portfolios. The active fund, Royal London Sustainable World, was top, returning over 10 per cent and beating both the FTSE World and FTSE 100 indices. The best passive holding achieved 5.6 per cent, while trailing the pack was robo adviser Moneyfarm with returns of 3.5 per cent. I won’t be abandoning my actively managed portfolio anytime soon, but I am intrigued by the Exo blueprint (it’s launching later this year) as a potential core holding. Quite apart from the prospect of optimised risk-adjusted returns, in a world where consumers can express their personal preferences in everything from bespoke trainers to phone ringtones, it should surely be possible for ordinary investors to customise a simple fund portfolio as a matter of course. 

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