- Titan Invest claims top spot in the first quarter
- Wealthsimple fares well thanks to low volatility ETF holdings
- SRI portfolios do well, taking two of the top three spots over the quarter
How Have Robo Advisors Fared During the Coronavirus?
More so than in previous periods, many robo advisors with unique strategies or holdings performed better in terms of performance above/below the Normalized Benchmark.
Titan Invest, which fully allocates its portfolio to equities, was the top performer in terms of performance above/below the Normalized Benchmark in the first quarter of 2020; its portfolio also had the best equity performance over the same period. It purchased a short S&P 500 fund during the quarter. This is a holding we have never seen in any of our robo portfolios before, but it proved quite timely. From the date it was purchased on March 3rd until March 31st, the fund returned 8.02%, a period where the S&P 500 was down 13.79%. Titan also holds individual securities. A select few of its holdings—Amazon, Microsoft, and Netflix—were up for the quarter, while nearly all major equity indices were in the red.
Wealthsimple Does Well Across the Board
Among our moderate portfolios (equity allocations close to 60%), our Wealthsimple portfolio had the best total-portfolio performance above/below the benchmark, the best fixed-income performance, and the second-best equity performance. Our Wealthsimple SRI and Halal portfolios placed third and sixth, respectively, when compared to the Normalized Benchmark. The standard Wealthsimple portfolio stood out because the entirety of its fixed income holdings is investment grade, with nearly two-thirds being long-duration U.S. Treasury bonds. When the Federal Reserve lowers interest rates, long-duration bonds will increase in price more than short-duration bonds will. The result was a 9.43% fixed income return in the first quarter and a 12.36% return over the one-year trailing period.
The next best fixed-income performer (after Wealthsimple SRI) was FutureAdvisor. FutureAdvisor also holds all investment-grade fixed income and relies heavily on a Barclays Aggregate Bond Index-tracking ETF, which has a large allocation to treasuries, helping it achieve a 2.82% fixed-income return for the quarter. On the equity side, Wealthsimple benefited from its holdings of two international minimum volatility funds. In our previous Robo Report™, we cited these funds as hurting Wealthsimple’s performance when markets were rising. In this volatile bear market, they have had the opposite effect.
Where Did Robo Advisors Fall Short?
The worst moderately allocated (60%/40% target) performer when compared to the Normalized Benchmark was our Morgan Stanley Inflation Conscious portfolio. Its fixed-income holdings were concentrated in higher-quality issues and the underlying funds hold many treasuries, resulting in overall strong fixed-income performance, but its equity holdings had the worst performance, posting a loss of 28.34%. This portfolio holds a Master Limited Partnership (MLP) energy ETF. COVID-19 has hit the energy industry particularly hard, as demand has dried up and political battles have boosted supply. This fund returned -59% in the first quarter. Its higher-than-average allocation to small- and mid-cap stocks also hurt its performance, as these groups underperformed large-caps over the same period.
Wells Fargo had the worst fixed-income returns in the first quarter with a loss of 3.70%. Although much of its fixed income allocation is in a Barclays Aggregate Bond Index-tracking ETF, it had close to one-third of its fixed income exposure in high yield corporate and emerging market ETFs. These two areas of the bond market were very hard hit, particularly emerging markets.
Schwab Continues to Underperform
Schwab has fallen short again. Our Schwab Domestic Focus and standard portfolios placed in the bottom five of first-quarter returns compared to the Normalized Benchmark. The standard portfolio’s equity performance was slightly worse since it has more exposure to international equities. The Domestic Focus was only slightly better and was the third-worst equity performer. One of the primary factors driving Schwab’s underperformance is its tilt towards value. Value stocks have consistently underperformed growth over the past three years, including during the recent market volatility. Among all the robo advisors we track, Schwab holds the most cash as a percentage of the total portfolio. This may have helped since part of the portfolio was not in equities, but it also can hurt if an investor could otherwise be in investment-grade fixed income, specifically treasuries, which do well during tough times. The cash is not only a drag on performance during bull markets, but we are also seeing it as a drag in bear markets compared to other robos who have used this part of the portfolio to invest in high-quality, longer duration fixed income.