Robo adviser SRI portfolios outperform traditional investing styles

New report from Backend Benchmarking provides good news for the outlook of sustainable investing

Nov 4, 2019 @ 2:00 pm

By Ryan W. Neal

Socially responsible portfolios are outperforming their standard counterparts offered by several digital advisers, according to a new report by research firm Backend Benchmarking.

Backend looked at six socially responsible investing portfolios opened at a robo-adviser with at least a year of performance data; of those, four have performed better than a standard portfolio offered by the same robo.

[Recommended Video: What's next for socially responsible investing?]

SRI portfolios offered by Wealthsimple and Morgan Stanley's digital adviser, Access Investing, performed exceptionally well, beating their respective standard offerings by more than 2% in the trailing one-year period.

"For SRI portfolios to outperform they must overcome the increase in costs of the underlying funds," David Goldstone, head of research at Backend Benchmarking, wrote in the report. "Although one year is still a relatively short period to judge long-term trends, the comparable performance of SRI portfolios is a positive sign for this investing trend if it is shown that investors do not pay a performance premium to consider environmental, social or governance factors when constructing portfolios."

[More: Pacific Life shutters ESG robo-adviser Swell Investing]

The researchers attributed the outperformance of Morgan Stanley's SRI portfolio to much lower international allocation. Morgan Stanley was unable to comment by press time.

Backend said a number of tax-loss harvesting trades left SRI portfolios managed by TD Ameritrade's robo-adviser highly allocated in cash, dragging on its performance.

In other findings, the Backend report said a high cash allocation is dragging on performance at Schwab Intelligent Portfolios. Schwab has faced criticism for its cash holdings in the past, and Backend said that is contributing to underperformance in the two- and three-year time frames.

[More: Schwab hybrid robo sees early success with subscription pricing]

Personal Capital and Betterment also are underperforming in the two- and three-year time periods relative to other digital advisers, the researchers said.

In a written statement, Betterment said it is built for the long term and is not trying to optimize for short time horizons.

"Additionally, the study does not utilize the platform properly to optimize for performance, i.e., taxable and tax advantaged accounts, regular cash flows, etc.," the firm wrote.

Personal Capital, in a written statement, said its longer term performance "remains favorable compared to most robo advisers and one account is not necessarily representative of the performance of our more than 21,000 clients."

In other conclusions, Axos Invest (formerly WiseBanyan) and Fidelity Go stand out from the pack in terms of longer-term results, according to Backend. Fidelity's digital adviser holds most of its equities in a single S&P 500 fund and has a lower-than average allocation to international, the analysis said.

Fidelity spokesman Robert Beauregard attributed Fidelity Go's strong performance to moving underlying investments into Fidelity Flex funds, which have zero expense ratios.

"If you look at the total return after fees, we get an edge because those funds don't charge any fees," Mr. Beauregard said. "If other people are tracking the same benchmarks, certainly we'll outperform those funds that have associated expense ratios."

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