Robo adviser performance one year in: are you a better investor than an automated financial adviser?

Robo advisers providing DIY investment have been around for only a matter of months – but it’s long enough for an initial assessment of how their investment performance stacks up so far.

As artificial intelligence and digital propositions start to weave their way into the financial mainstream, it is natural for consumers and investors to ask how well these digital newcomers are doing. 

So-called robo advisers offer DIY investment portfolios for those who don't want to pay an adviser or a private bank, or for those investors who don’t believe they can outperform an algorithm. 

Investors either self-select a risk profile or take a short quiz which allocates them to one. Each robo will normally offer between 5 and 10 ‘risk profiles’ and assemble portfolios that map to these. The higher your risk profile the (typically) larger your slug of shares or equities. 

2017 is expected to be a year of huge growth in robo advice, with Investec and UBS the latest names to join the line-up. However, for consumers looking to invest online, without the help of a financial adviser, performance and investment skills are critically important, yet very hard to assess as this market remains in its infancy. 

These providers are still so new that although to date we have compared fees and advertising campaigns and websites, we have not until now looked at the whole raison d’etre of all of this, namely performance and returns.

We have worked with Morningstar Investment Management Europe to draw a line in the sand and start to analyse the risk and returns of the major robo-advisers in the UK today. 

These are early days. Just three providers had a track record of more than 12 months as at the end of 2016 – MoneyFarm, Nutmeg and True Potential.  Nutmeg is by far the most established robo with over four years of track record, which gives them greater credibility today although this competitive advantage will erode over time. 

Portfolios were grouped according to asset allocation and then benchmarked by Morningstar to compare their performance against what it calls ‘a reasonably diverse portfolio of investment views and the asset allocation of a UK investor seeking access to capital markets using publicly available low-cost ETFs and tracker funds’. It calls these, rather charmingly, its ‘naïve benchmarks’. 

Robo adviser returns varied dramatically over 2016. The variance in performance surprised me. Over the course of 2016, returns in a Moderate portfolio (this assumes total equity allocation of around 60 per cent) from the three robos in questions varied between 7.6 and 16.9 per cent. These numbers are calculated after fees. This was against a naïve benchmark of 18.3 per cent. 

NutmegNutmeg Managed 67.6%
MoneyFarmMoneyFarm Portfolio 516.9%
True PotentialTrue Potential Balanced Income Portfolio14.9%

The huge disparity between returns from robos reflects asset allocation differences

Twelve months – and such a bonkers 12 months – is not a sufficient timeframe on which to make a judgement. The key thing of interest here is that although most of these players use so-called passive investments, the tweaking of the asset allocations is anything but passive. 

Big calls are being made. And against a backdrop of Brexit and Trump, and lumpy, volatile markets, these calls have had very significant impacts. 

If we look at some examples, Nutmeg’s Moderate Portfolio 6 had an average allocation of 18 per cent US equities over 2016 and 24 per cent in the UK. This is dramatically different from the MoneyFarm portfolio, which had an overall similar equity weighting – but when broken down into regions, saw an average of 32 per cent in the US and just 4 per cent in the UK. 

Of course these portfolios can also move in and out of cash, and with cash holdings varying from averages of 7 to 17 per cent, timing becomes critical to overall returns. 

Risk levels also varied significanlty between robos

Returns are just one side of the investment coin. The other factor is the level of risk taken to achieve these returns. To use an extreme example, if you had invested 100 per cent into Peru last year you would have made circa 90 percent - but taken on stratospheic risk levels to do so. And you can't be doing that with customers' money.

The chart below looks at risk. To include more providers we had to go even shorter-term, so take this with all the necessary caveats and don’t rely on it to make decisions – but we’re illustrating a point here.

Look at the differing degrees of risk that the robos took to achieve their returns.  So even though the customer might assume he or she is in a very similar bucket of investments, for a similar ‘risk profile’ the actual risk attached is significantly different.  Some provided a much less bumpy ride than others. 

Risk/returns for the Moderate portfolios (only available over 8 months so illustrative only!) 

Across the robos’ most aggressive portfolios, returns over 2016 varied from 15 to 18 per cent

If you’re a hobbyist investor, with a DIY portfolio fully invested in shares, how did you do in 2016? It would be interesting to assess your returns – and then ask yourself an honest question about the risk you took as well. 

Did you do better than the robos? As the global political spectrum gets crazier by the day, is 2017 the year to admit that Metal Mickey might make you more, with less risk and a lot less time?

We at Boring Money act as an independent and have no commercial axe to grind. We’re simply trying to help consumers work out who is doing a good job. And no investment manager likes being put under the microscope. 

They say the timeframes are too short (which is true today). They don’t like the benchmarks. They don’t like the interpretations. They don’t like the positioning. 

But if these guys are to take on the Establishment, which I believe they will, they can’t play by a different set of rules or argue for preferential treatment because they have funkier websites and catchier names.  Performance will be scrutinised, and we can start to do this – with hefty caveats – now. 

In order to be credible, robos will need to beat these naïve benchmarks (or similar metrics) over time

We will be collecting this data quarterly. Wealthify is the latest robo to have 12 months of track record today, to be followed shortly by Scalable Capital’s UK registered portfolio service. Watch this space. 

Holly Mackay is managing director of Boring Money 

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