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Robos' first big test: how did they fare?

Robos' first big test: how did they fare?

Ever since the trickle of new robo-advisers turned into a flood, industry observers have been waiting to see how they perform in a period of market dislocation.

The referendum has provided an early test, so how well were this new breed of asset managers able to navigate their clients through the sharp gyrations seen across multiple asset classes in the Brexit fallout?

Being positioned defensively and globally diversified, typically through holdings in low-cost ETFs enabled several robo-advisers to weather the storm.

Going into the referendum, Wealthify, which was only launched in April, had positioned its clients’ investments cautiously, with cash balances of up to 40% in some portfolios.

‘We did think that it [Brexit] had been discounted a bit too readily by markets so we ensured we had diversified and had currency exposure outside of sterling,’ said Michelle Pearce, the firm’s chief investment officer.

On the day of the referendum, Pearce said the team made a few changes, the first of which was to sell out of all UK property exposure. ‘We suspected this was going to be one of the areas that was going to be hit,’ she said.

One of the holdings she exited quickly was Threadneedle UK Property and although Pearce says that the reasons for buying the fund remain valid, considering property funds had gated investors in the past, it seemed likely this could happen again, as proved to be the case.

‘We managed to get out without incurring any loss to investors. Outside of property, we had up to 40%, held mainly in physical cash, but also some cash-equivalent and money market funds. We sold out of those and moved into physical cash so we can take advantage [of the asset price falls] later.’

On the day of the referendum result, Wealthify’s portfolios rose by between 0.5% and 7%. Post-Brexit, they are now up 2.5%-5% since launch, depending on the different risk profiles.

Pearce said that as the Brexit dust settles, she will look for opportunities to deploy the cash weightings.

‘There is now a big opportunity in the Reit space and [we] are also looking at the iShares UK Property ETF. On Brexit it was down around 22-23% and we thought maybe this is a time to get back in,’ she said.

Scalable Capital, another newcomer, takes an algorithm-based investment approach which rebalances client portfolios according to projections of future market risk. In the run up to the referendum, the firm made several changes to client portfolios, based on their risk tolerance.

‘When there are big changes in the market dynamic, we make relatively big changes in client portfolios. On average, across different risk categories, the equity allocation in client portfolios is much lower. From the forward-looking risk projections we run, we saw that the risk was getting too high, so we made adjustments,’ said co-founder Adam French.

The team initially reduced the equity allocation in the portfolios. In the highest risk categories, it was less than 40%, while in medium risk portfolios it was below 25% and sub-8% in the most conservative portfolios.

In the UK, Scalable Capital started investing for its first clients in April, and their portfolios are up by as much as 10%.

‘On the 24th, because we had a very globally diversified approach and reallocated a lot of the portfolios from equities, portfolios were up on average approximately 6%. Since then we’ve been able to keep performance at 10%,’ French said.

Within the portfolios, the allocation to fixed income, mostly held in government and corporate bonds, was increased.

This is in contrast to Wealthify’s approach of starting to reduce its fixed income allocation. Pearce says the thinking behind this is her belief that the asset class looks expensive and the potential risks outweigh the potential returns.

Compared to Wealthify and Scalable Capital’s infancy in the market, Nutmeg is a more established player.

CIO Shaun Port said that although the firm believed the UK would most likely vote to remain, they had still looked for ways to protect against Brexit risk.

In February, he completely sold out of the FTSE 250 and rotated into the FTSE 100, as he expected mid and small caps to be negatively impacted by an out vote.

‘In the final few weeks we thought the risk of leave was quite understated. We have quite a distrust for the polls, given that it was such an unusual vote. We added quite a lot more protection to portfolios,’ he said.

‘We took some punchy moves and cut our European and Japanese equity exposure as we thought they would be hit by risk off sentiments. We added gold to a wide range of our portfolios. We were buying 15 year plus gilt ETFs, increasing the fixed income exposure,’ he said.

In the first two days following the referendum, the FTSE All Share was down 7%, while Nutmeg’s portfolios were down no more than 1%, while the vast majority of portfolios had positive gains, Port said.

Since the referendum, portfolios are up between 0.5% and 7.5%, meaning from this relatively small sample, the robos have passed their first major market test but there will undoubtedly be more to come.  

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