How do you monitor the performance of investment portfolios generated by computer algorithms and tailored to the financial needs and objectives of the users?
The answer: with great difficulty.
The problem lies in the fact that you do not compare apples with apples here, because portfolios that are built by these systems, called robo advisors, can contain a unique mix of stocks, bonds and other investments that are designed to connect to the specific needs of each customer.
Most online asset managers compare their portfolios with investment expert indexes that combine and merge the performance of the entire asset management industry.
Although a direct comparison is almost impossible, you can get a good idea of whether your portfolio is running out of business by comparing it with competitive offers.
But could you have a better deal by investing elsewhere in a venture capital? We take a look.
How to measure the performance of robo investments
The bottom line is that it is really difficult to measure the performance of robo consultants at this time.
Most robo consultants do not publish their performance figures and many have performance data that goes back only two years, which is not enough time to draw fair investment comparisons.
There are, however, some ways to get an idea of how well your investments are performing, and it is not as easy as drilling out returns over the performance of a market index like the FTSE 100.
The reason for this is that these systems, also known as online asset managers, typically compile risk-accounting portfolios from a range of global assets including equities and bonds, while the FTSE 100 is a stock index that aggregates the performance of 100 largest UK companies.
Risk qualifications and diversification play no role here. At present, oil, raw materials and financial sectors account for more than 40 percent of the FTSE 100 index.
No asset manager, human or robo, who is worth their salt, would therefore only want to invest in the FTSE 100 as a long-term savings strategy.
So forget what the FTSE does when you try to find out if you have a good deal.
Instead, we have completed the most beautiful things that you could view.
You would probably earn more money by investing in a non-advised portfolio, but that means taking responsibility for determining your own investment goals
1. ARC indices
Most online asset managers compare their portfolios with Asset Risk Consultants indices that combine the performance of the entire wealth management industry – including private banking institutions such as Coutts & Co and JP Morgan Private Bank.
A comparison between peers seems reasonable. The problem is that not all robo advisors easily make their performance data known and that the ARC indices are not available to the lay investor to perform comparisons for themselves.
2. Model portfolio
Another option is to upgrade a portfolio recommended by robo against unadvised portfolios with a similar risk classification.
These include all-in-one funds, also called model portfolios, that spread investments across different types of assets and countries.
The LifeStrategy range from Vanguard, which invests in low-cost tracker funds, is a frequently tipped example.
Vanguard funds offer different levels of exposure to equities, ranging from 20 percent to 100 percent. The money is cheap, with a running cost of 0.22 percent.
3. Active fund manager
It is also worth comparing a robo-advised portfolio with that of meat and blood managers with similar asset allocations to your portfolio.
The mixed investment sectors of the Investment Association cover a wide range of strategies, from prudent to more adventurous.
Robo-returns in practice
In order to give you some guidance on how to get started, we have compared the performance of portfolios with high, medium and low risk offered by Nutmeg to see how they are taking on the Vanguard funds and mixed investment sector average of the Investment Association.
We chose Nutmeg because it is the only robo advisor on the UK market with a five-year performance record – which is ideal for comparison purposes, as many experts recommend investing for at least five years for a smooth return.
In the past five years until June 30, 2018 (the most recent data available), the Nutmeg 10 high risk card, which can only invest in equities, yielded a return of 56 percent, converting £ 1,000 into £ 1,560.
This lagged behind the return of 77.04 percent achieved by the equally risky Vanguard Lifestrategy 100 fund, which simply invests in shares – nothing else.
However, the performance of Nutmeg 10 exceeded the flexible investment sector IA, which can invest up to 100 percent in shares or invest a large part in bonds or cash. The funds in the sector returned an average of 44.98 percent.
The performance of the nutmeg further in the risk spectrum were less good.
|Fund / Sector||5 year performance until 30 June 2018 (%)||Risk|
|Vanguard Lifestrategy 100||77.04||high|
|IA Flexible investment||44.98||high|
|Vanguard Lifestrategy 60||52.36||Mediocre|
|IA Mixed investments 20-60%||30.95||Mediocre|
|Vanguard Lifestrategy 20||29.64||Low|
|IA Mixed investments 0-35%||21.96||Low|
|Source: this is money, nutmeg & FE analysis|
The Nutmeg 6 portfolio, where the target allocation is 60 percent shares, returned 30.7 percent, less than 52.36 percent generated by Vanguard Lifestrategy 60.
It also did not perform in the I Mixed Investments sector by 20-60% (with a share of between 20% and 60%) and 30.95%.
The Nutmeg 20 portfolio, which represents 20 percent risk, returned 14 percent against the return of 29.64 percent of the comparable Vanguard Lifestrategy 20 and 21.96 of the average IA fund that can hold only 35 percent in equities.
Is this a fair comparison?
James McManus, head of ETF research at Nutmeg, does not think so.
He said: "Nutmuskeg portfolios selected for comparison are actively managed by our investment team, which means that they do not always retain the full level of risk that is available.
& # 39; The portfolios are positioned according to the view of our investment team on the prevailing environment and the risks and benefits that this generates for various asset classes. It is therefore important to consider the risk-adjusted returns rather than just absolute returns. & # 39;
He added: & # 39; Nutmeg portfolios are specially built with British investors in mind, where Vanguard is not. A very important part of this is the role that currency risk & # 39; s play in a portfolio. British investors usually have the majority of their liabilities in British pounds, making the currency risk a primary concern in global investments. & # 39;
Why invest via a robo advisor?
The truth is that you can probably earn more money by investing in a non-advised portfolio. But this means taking responsibility for determining your own investment goals, developing your risk appetite and choosing your own investments – even if you buy ready-made portfolios.
But not everyone has the time, expertise or inclination to manage their own money.
This is where robo advisors can help – and at a fraction of the cost of traditional financial advice that people of flesh and blood offer.
For more information, read our guide about finding the best robo advisor to invest in and whether they offer real financial advice.
But if you prefer to make your own recordings, investing via a do-it-yourself platform is probably the best choice. Our guide on how to choose the best (and cheapest) DIY investment Isa can help you on your way.