Volatility returned to markets in the first quarter of 2018, testing how robo advisers would handle a major pullback.
Despite some hiccups with clients being unable to log in, the automated portfolios performed quite well, according to the latest edition of The Robo Report from BackEnd Benchmarking, a research firm launched by registered investment adviser Condor Capital.
The S&P 500 moved at least 2% on six different days during the quarter (no such days occurred in all of 2017), and ended the quarter -0.76%. Most robos beat the index, and BackEnd research analyst David Goldstone said even the worst performers didn't drop much.
"The difference between the best and worst was not big," Mr. Goldstone said, adding that performance was similar to what should be expected of a passively managed strategy.
SoFi, an online lending platform that launched a robo-adviser in May 2017, performed best, keeping quarterly losses to just 0.14% in taxable accounts. The robo's IRAs ended the quarter with 0.49% gains.
Mr. Goldstone attribute SoFi's success to having one of the highest allocations to emerging markets.
SoFi also allocated a majority of their fixed income to a single high-yield municipal bond that outperformed other segments of the domestic fixed income market.
Digital advisers that employed active funds or strategies in portfolios also found success.
T. Rowe Price's robo-adviser, ActivePlus Portfolios, only offers IRAs built by a collection of proprietary, actively managed funds. The product led the IRA category, generating returns of 0.77% in the quarter.
Acorns' taxable accounts struggled the most with Q1's volatility, posting losses of 1.55%. Hedgeable posted the worst returns in its IRA accounts with losses of 1.43%.
(More: Acorns co-founder believes his new technology can get clients more engaged with investments)
To measure and compare the performance of portfolios managed by digital advisers, BackEnd Benchmarking opens and funds accounts seeking a similar investor profile across each platform. For the taxable accounts, the analysts aim for a moderate allocation of 60% stocks and 40% bonds for an investor in a high tax bracket. IRAs are invested in the most-aggressive allocation possible.
In the two years the company has robo-advisers' perfomance, Schwab's Intelligent Portfolios has performed the best overall, followed by SigFig and
Betterment.
TD Ameritrade's robo products, Selective and Essential Portfolios, were recognized for posting the best one-year returns.
"We work hard to create portfolios that will give our clients the best chance of achieving their investing goals, so it's gratifying to see our decisions having paid off over the past year," said Keith Denerstein, director of guidance project management for TD Ameritrade
BackEnd's relationship with Condor Capital has caused some robos to object to the Robo Report. Since 2016,
Wealthfront has removed BackEnd's accounts from the service, citing language in its user agreement prohibiting accounts from being used for commercial purposes or competitive analysis.
The benchmarking project began at Condor Capital before being transferred to BackEnd. BackEnd president Ken Schapiro said that while the companies share ownership and management, the two operate as separate entities.
BackEnd still has an account open with
Wealthfront, reporting that while the robo lost 1.06% in the first quarter, it has generated 9.92% one-year trailing returns.
There is debate whether BackEnd's analysts use the robo account as the average investor would, calling into doubt some of the data. Others question the value of focusing on short-term performance data without taking into account a platform's full range of services.
Vanguard spokesman Timothy Stokes declined to comment on the report, but said in an email, "as with mutual funds, past performance of any advice service is no guarantee of future success. As such, investors evaluating digital advice providers should look to kick all the tires, including all-in-costs; the reputation and track record of the provider; and the availability and access to ongoing counsel and coaching on progress to long-term goals, among other things."
Vanguard also includes language in the user agreement of its robo, Personal Advisor Services, prohibiting commercial accounts.
