If only the portfolios managed by Wealthsimple’s robo-advisory business grew as much as the company itself.
Wealthsimple has been killing it lately. Money is flowing into a growing range of financial services for DIY investors, including stock trading, banking and, more recently, mortgage lending. But Wealthsimple’s original robo-advisor business, which it calls managed portfolios, is less than impressive with its investment results.
Note that returns have lagged many competitors over the past five years, including other robo advisors, all-in-one exchange-traded funds, and a planet-sized bank mutual fund, which is the kind of product that robots should theoretically beat after fees are charged.
If Wealthsimple manages a portfolio for you, it’s time to reacquaint yourself with the mix of your investments and evaluate how you’re progressing toward your investment goals. Don’t rush to jump in – Wealthsimple portfolios could be advantageous if the white-hot US market declines.
Ben Reeves, chief investment officer at Wealthsimple, says the company’s portfolios are designed to provide a trade-off: In times like now, when North American stocks are performing very well, the remaining performance is in exchange for steady returns that blunt stock market extremes.
“We provide access to a broad range of risky assets that will help our investors achieve their goals over the long term,” Mr. Reeves said in an interview.
Rob Carrick: Wealthsimple is starting to look like Canada’s next big bank
Wealthsimple offers three classic managed portfolios—growth, balanced, and conservative—as well as permutations of each customized to the client’s needs. Socially responsible and halal portfolios are also available. The idea of all the funds is to gather a diversified collection of low-cost exchange-traded funds into a portfolio and then manage it for a fee starting from 0.5 percent. This is in addition to modest fees for ETFs in portfolios.
Managed portfolios are perfect for people who understand the advantage of low-cost investing while paying less and keeping more money, but who also need help with important tasks like diversification and rebalancing.
Given the core mandate of managed portfolios and the common use of index-tracking ETFs, you’d expect returns across the various players to be fairly similar. But this is not happening.
Wealthsimple’s popular growth portfolio, which is 80 percent stocks, 20 percent bonds and gold, had a five-year average annual total return after fees of 7 percent as of the end of May. Historically speaking, such a net return over a five-year period is a good result. However, there have been better returns in the last five years.
Wealthsimple’s best-performing competitor, Justwealth Financial, achieved an average annual return of 9.1 percent through its comparable Global High Growth Portfolio. Another competitor, Questwealth Portfolios, achieved 8.5 percent growth in its portfolio. The iShares Core Growth ETF Portfolio (XGRO-T) and Vanguard Growth ETF Portfolio (VGRO-T), which are all-in-one ETFs, gained 9.2 percent and 8.8 percent, respectively. All-in-one ETFs offer fully managed portfolios, but investors must open a brokerage account or use a trading app to purchase them directly.
Wealthsimple’s balanced portfolio has delivered an average annual return of 4.5% over the past five years; That’s less than several rivals with a comparable mix of about 60% stocks and 40% bonds. One example is the $54 billion RBC Select Balanced Portfolio Series A, a classic bank offering with a high fee of 1.94% and an average five-year average annual return of 5.6%.
On the one hand, the entire managed portfolio sector in Canada has approximately $30 billion in assets, according to Investor Economics, part of market analysis firm ISS Market Intelligence. Wealthsimple, the market leader in assets, controls more than 80 percent of the market along with Questrade and BMO SmartFolio.
Investors need to evaluate managed portfolio returns over the last five years because neither player has stuck around long enough to post more significant 10-year results. But Mr. Reeves said five-year returns could mislead investors with numbers reflecting past trends that will fade as time goes by. He said it is more important to choose a portfolio that manages risk well through diversification.
More than fees, the biggest factor in comparing competing products like managed portfolios and all-in-one ETFs is diversity. They all include bonds as well as Canadian, U.S. and international stocks, but the actual mix can vary significantly.
Wealthsimple provides more international visibility than others; That means more money is being invested in stock markets outside North America, unlike the Canadian or U.S. market, which appears vulnerable to a correction after surprising gains in recent years.
“You will be left behind while the United States and Canada are ahead,” Mr. Reeves said. “And you can do better when other regions lead the way. That’s the nature of trying to be more consistent; That’s actually the trade-off.”
Rob Carrick: Wealthsimple and other low-cost players are taking the big banks’ online brokerages to school when it comes to customer satisfaction
Wealthsimple also made more subtle calls that impact performance. When interest rates started rising a few years ago, he held large positions in an ETF that invests in long-term bonds. Long bonds perform better when interest rates fall and perform poorly when interest rates rise. Wealthsimple portfolios have recently included a small weighting in gold, which has performed well since February.
Mr. Reeves recommended that Wealthsimple clients stick with their portfolios with the understanding that they will, and will, outperform other portfolios at times. “The worst thing you can do is take five years of returns and allocate it to whatever is performing better,” he said. “That’s basically a recipe for underperformance.”
Are you a young Canadian with money on your mind? To set yourself up for success and avoid costly mistakes, Listen to our award-winning Stress Test podcast.
