If only the portfolios managed by Wealthsimple’s robo-adviser business grew like the company itself.
Wealthsimple is killing it lately. Money has been pouring into a growing line of financial services that includes stock trading for DIY investors, banking and, recently, mortgages. But Wealthsimple’s original robo-advice business, which it calls managed portfolios, does not impress with its investment results.
Returns lag many competitors over the past five years, including other robo-advisers, all-in-one exchange-traded funds and a planet-sized bank mutual fund that is just the sort of product that robos should theoretically be trouncing once fees are taken into account.
If Wealthsimple is managing a portfolio for you, it’s time to refamiliarize yourself with your mix of investments and consider how you’re progressing toward your investment goals. Don’t be quick to jump – Wealthsimple portfolios may have an advantage if the white-hot U.S. market tanks.
Wealthsimple chief investment officer Ben Reeves says the company’s portfolios are designed to provide a trade-off: Lagging performance at times like now, when North American stocks are doing very well, in exchange for steady returns that blunt stock market extremes.
“We are providing broadly diversified exposure to risky assets that should help our investors achieve their goals over long periods of time,” Mr. Reeves said in an interview.
Rob Carrick: Wealthsimple is starting to look like Canada’s next big bank
Canada’s robo-advisers are delivering different returns to their customers. Why the dispersion?
Wealthsimple offers three classic managed portfolios – growth, balanced and conservative, as well as permutations of each that are customized to a client’s needs. Socially responsible and halal portfolios are also available. The idea for all its funds is to bundle a diversified collection of low-cost exchange-traded funds into a portfolio and then manage it for a fee that starts at 0.5 per cent. That’s in addition to modest fees for the ETFs in the portfolios.
Managed portfolios are perfect for people who understand the obvious pay-less, keep-more benefits of low-cost investing, but also want help with important tasks such as diversification and rebalancing.
Given the basic mandate of managed portfolios and the common use of index-tracking ETFs, you’d expect that returns between the various players would be fairly similar. But that’s not happening.
Wealthsimple’s popular growth portfolio – that’s 80-per-cent stocks, 20-per-cent bonds and gold – has a five-year average annual total return of 7 per cent after fees as of the end of May. Historically speaking, a net return like that over a five-year span is a good result. But in the past five years, better returns were available.
Justwealth Financial, a top-performing competitor to Wealthsimple, delivered 9.1 per cent on an average annual basis through its comparable Global High Growth Portfolio. Another competitor, Questwealth Portfolios, made 8.5 per cent in its growth portfolio. A pair of all-in-one ETFs, the iShares Core Growth ETF Portfolio (XGRO-T) and the Vanguard Growth ETF Portfolio (VGRO-T) made 9.2 per cent and 8.8 per cent, respectively. All-in-one ETFs offer fully managed portfolios, but investors must open a brokerage account or use a trading app to buy them directly.
Wealthsimple’s balanced portfolio made an average annual 4.5 per cent for the past five years, less than several competitors with a comparable mix of roughly 60-per-cent stocks and 40-per-cent bonds. One example is the $54-billion RBC Select Balanced Portfolio Series A, a classic bank offering with a chunky fee of 1.94 per cent and average annual five-year return of 5.6 per cent.
As an aside, the entire managed portfolio sector in Canada has about $30-billion in assets, according to Investor Economics, which is part of market analysis firm ISS Market Intelligence. Wealthsimple, the market leader in assets, along with Questrade and BMO SmartFolio, controls more than 80 per cent of the market.
Investors must assess managed portfolio returns over the past five years because none of the players have been around long enough to publish more substantive 10-year results. But Mr. Reeves said five-year returns can mislead investors with numbers reflecting past trends that will fade as time passes. He said it’s more important to pick a portfolio that manages risk well through diversification.
More than fees, the big factor in comparing managed portfolios and competing products, such as all-in-one ETFs, is diversification. All include bonds plus Canadian, U.S. and international stocks, but the actual mix can differ significantly.
Wealthsimple provides more international exposure than some others – that means more money invested in stock markets outside North America as opposed to Canada or the U.S. market, which seems vulnerable to a correction after its amazing gains in recent years.
“When the U.S. and Canada lead, you’re going to lag,” Mr. Reeves said. “And then when other regions lead, you might do better. That’s the nature of trying to be more consistent – that’s really the trade-off.”
Wealthsimple has also made more subtle calls that affect performance. A few years ago, as interest rates started to rise, it held large positions in an ETF that invested in long-term bonds. Long bonds outperform when interest rates are falling, and poorly when rates move higher. Wealthsimple portfolios recently include a small weighting in gold, which has done well since February.
Mr. Reeves suggested Wealthsimple clients stick to their portfolios on the understanding that they will surpass and trail other portfolios at times. “The worst thing you can do is take five-year returns and allocate to the thing that just outperformed,” he said. “That is basically the recipe for underperformance.”
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Rob Carrick