Robo Advisors:  Performance Data From Multiple Management Firms

by: Lowell Herr

Summary

Tracking performance from robo advisors.

Relative positives and negatives.

Examination of an alternate management model.

Robo Advisors have been around for approximately ten years, but I did not learn of their existence until about three years ago. A primary motivation for a closer look into computer managed portfolios came from a question not uncommon in many households. Who will manage the portfolio when you are gone? This is not an easy question to deal with, but it does demand an answer.

One reasonable answer to the question is to find a money manager who would outlive both of us. Robo management seemed like a good solution as they subscribe to the Strategic Asset Allocation model of investing. I decided to invest over $100,000 with a firm so as to keep the management fees to 15 basis points. The initial investment was launched on 9/19/2016. It took until 11/10/2016 before the first ETFs were purchased and the portfolio populated.

The equity/bond percentage ratio was 80/20. The portfolio was managed by the robo service until November of 2017. The switch was made when the company raise management fees from 15 basis points to 25 basis points. This increase seemed excessive so the account was moved to where it was managed using a Tactical Asset Allocation Momentum model.

Robo Advisor Performance: The following data runs from 9/30/2016 through 11/30/2017. Five benchmarks are shown in the following screenshot. This information comes from the Investment Account Manager portfolio tracking software developed by Quant IX. The Internal Rate of Return of the portfolio (14.66%) lags the S&P 500 (18.66%) as expected since the portfolio is not 100% in equities. The four Vanguard target benchmarks are for 2020, 2030, 2040, and 2050. As the out years increase, each fund carries a higher percentage in equities. The second target benchmark (14.18%) has a similar equity/bond ratio to the robo portfolio (14.66%) and the performance is similar. The robo advisor is meeting their goals.

Active Management Performance: Since taking over the management of this account, the portfolio is outperforming all the Vanguard Target Funds, but still lags the S&P 500. The following performance data is for the first two quarters of 2018 as that is how long this portfolio has been under active management.

To provide additional Robo Advisor information, portfolios were opened in two different firms. In each case a request to invest 100% in equities was met with resistance due to my age. While not completely invested only in equities, both portfolios are close to a 90/10 equity/bond ratio.

Performance Data for Two Robo Advisor Portfolios: The following performance data is for two robo advisor portfolios and the period is from 9/30/2017 through 6/30/2018. I use the September starting date as both portfolios were launched in September of 2017 and the 30th is the first date for which I have accurate benchmark IRR data.

The third and fourth Vanguard Target benchmarks hold equities similar to the two portfolios so the portfolios are lagging appropriate benchmarks.

As noted in the second screenshot above, the actively managed portfolio picks up ground on the Vanguard Target benchmarks. Is this an anomaly?

Performance Data for Seven Portfolios: The following performance data comes from seven actively portfolios that follow a Tactical Asset Allocation model known as the Linear Regression Projection-Convolution (LRPC) model. Each portfolio is reviewed every 33 days so there is some luck-of-review-day involved. This results in some portfolios performing better than others. For example, one portfolio has an IRR value of over 55%. Within this particular is a particular security that boosted returns to where it is something of an outlier.

Early indication is that this LRPC model outperforms the Vanguard Target benchmarks, but still lags the S&P 500. The model is risk-averse so the performance should outstrip the S&P 500 when a major correction or recession strikes.

Questions and comments are welcome as the LRPC and robo portfolios are still in the early stages of testing.

Disclosure: I am/we are long SLYV, REM, RZV.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.