How to check the performance of your robo-adviser

How do you check the performance of investment portfolios generated by computer algorithms and tailored to the financial needs and objectives of its users?
The answer: with great difficulty.
The issue lies with the fact that you're not comparing apples with apples here as portfolios built by these systems, called robo-advisers, might include a unique blend of shares, bonds and other investments designed to align with the specific needs of each client.
While a direct comparison is nigh impossible, you can get a good idea of whether your portfolio is up to scratch by measuring it up against rival offerings.
But could you have got a better deal by investing in a risk-rated fund elsewhere? We take a look. 


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How to measure robo-investment performance
The bottom line on this is that it is really hard to measure robo-adviser performance at the moment. 
Most of the robo-advisers don't publish their performance figures and many have performance data going back only two years, which is not an ample amount time to draw fair investment comparisons.
However, there are some ways to get a feel for how well your investments are doing, and it isn't as simple as pitting returns against the performance of a market index like the FTSE 100.
This is because these systems, also known as online wealth managers, typically build risk-rated portfolios from a range of assets globally including shares and bonds, whereas the FTSE 100 is an equity index that aggregates the performance of 100 largest UK companies.
Risk ratings and diversification doesn't come into play here. At present, oil, commodities and financial sectors make up over 40 per cent of the FTSE 100 index.
No wealth manager, human or robo, worth their salt would recommend investing solely in the FTSE 100 as a long-term savings strategy for this reason.
So forget what the FTSE is doing when trying to figure out if you've got a good deal. 
Instead, we've rounded up the fairest things you could look at. 

1. ARC indices
Most online wealth managers benchmark their portfolios against Asset Risk Consultants indices which combine and aggregate performance from across the wealth management industry - including private banking institutions such as Coutts & Co and JP Morgan Private Bank.
A comparison among industry peers seems fair. Trouble is, not all robo-advisers readily disclose their performance data and the ARC indices aren't available for the lay investor to run comparisons for themselves.

2. Model portfolio
Another option is to pit a robo-advised portfolio against non-advised portfolios with a similar risk rating.
These include all-in-one funds, known as model portfolios, which spread investments across different asset types and countries.
Vanguard's LifeStrategy range, which invests in low-cost tracker funds, is an often-tipped example.
Vanguard's funds offer varying levels of stock market exposure, ranging from 20 per cent to 100 per cent. The funds are low-cost, with a 0.22 per cent ongoing charge.

3. Active fund manager
It is also worth comparing a robo-advised portfolio to those run by flesh and blood managers with similar asset allocations to your portfolio.
The Investment Association's mixed investment sectors encompass a wide variety of strategies from the cautious to the more adventurous. 

Robo-returns in practice 
To give you a bit of a steer on how to get started, we've compared the performance of high, medium and low risk portfolios offered by Nutmeg to see how they fare against the Vanguard funds and the Investment Association's mixed investment sector average.
We've singled out Nutmeg because it is the only robo-adviser in the UK market with a five-year performance record - which is ideal for comparison purposes as many experts recommend investing for a minimum of five years for a smoothed return. 
Over the past five years to 30 June 2018 (the latest data available), the high risk Nutmeg 10 portfolio, which can invest solely in shares, delivered returns of 56 per cent, turning £1,000 into £1,560.
This trailed behind the 77.04 per cent return achieved by the similarly high-risk Vanguard Lifestrategy 100 fund, which just invest in equities - nothing else.
However, Nutmeg 10's performance trumped the IA flexible investment sector - which can invest up to 100 per cent in shares or invest a large proportion in bonds or cash. Funds in the sector returned 44.98 per cent on average.
Nutmeg's performance further down the risk spectrum didn't fare as well. 
Nutmeg's portfolios vs Vanguard's Lifestrategy funds and IA sectors 
Fund/Sector 5 year performance to 30 June 2018 (%) Risk
Nutmeg 10 56 High
Vanguard Lifestrategy 100 77.04 High
IA Flexible Investment 44.98 High
Nutmeg 6 30.7 Moderate
Vanguard Lifestrategy 60 52.36 Moderate
IA Mixed Investments 20-60% 30.95 Moderate
Vanguard Lifestrategy 20 29.64 Low
Nutmeg 2 14 Low
IA Mixed Investments 0-35% 21.96 Low
Source: This is Money, Nutmeg & FE Analytics    

The Nutmeg 6 portfolio, where the target allocation is 60 per cent equities, returned 30.7 per cent, less than 52.36 per cent generated by Vanguard Lifestrategy 60.
It also unperformed the IA Mixed Investments 20-60 per cent sector (where the shares element can be between 20 per cent and 60 per cent) which returned and 30.95 per cent.
The Nutmeg 20 portfolio, which represents 20 per cent risk, returned 14 per cent versus the 29.64 per cent return of the comparable Vanguard Lifestrategy 20 and 21.96 of average IA fund that can only hold up to 35 per cent in shares.  

Is this a fair comparison? 
James McManus, head of ETF research at Nutmeg, doesn't think so. 
He said: 'Nutmeg portfolios selected for comparison are actively managed by our investment team, meaning they do not maintain the full level of risk available at all times.
'The portfolios are positioned according to our investment team's view of the prevailing environment, and the risks and rewards it poses to different asset classes. It is therefore important to consider the risk-adjusted returns, rather than just absolute returns.'
He added: 'Nutmeg's portfolios were built specifically with UK investors in mind, where Vanguard's aren't. One very important part of this is the role currency risk plays in a portfolio. UK investors typically have the majority of their liabilities in sterling, thus currency risk is a primary concern when investing globally.' 

Why invest through a robo adviser?
Truth is, you probably could make more money by investing in a non-advised portfolio. But doing so means taking responsibility for setting your own investment goals, working out your risk appetite and choosing your own investments - even if you buy ready-made portfolios.
But not everybody has the time, expertise or inclination to manage their own money.
This is where robo-advisers can help - and at a fraction of the cost of traditional finance advice offer by flesh and blood humans. 
For more information, read our guide on how to find the best robo-adviser to invest with and whether they really offer financial advice.
But if you prefer calling your own shots, investing through a DIY platform is probably your best bet. Our guide on how to choose the best (and cheapest) DIY investing Isa can help you on your way.
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