In their first bear market, robo advisor SRI portfolios outperform

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Socially responsible investing is helping robo advisors weather their first bear market.

Backend’s analysis adds to a growing body of data showing impact investing beat traditional benchmarks during the recent market downturn. Asset managers including Blackrock, Allianz Global Investors and Invesco have all published research demonstrating how SRI and ESG portfolios offered more downside protection during the coronavirus crisis.

During the first quarter of 2020, five of the eight SRI portfolios tracked by Backend Benchmarking, which opens accounts with several robo advisors to track performance, outperformed their non-SRI counterparts from the same provider on a net-of-fees basis. Of the 66 taxable portfolios Backend tracked, two SRI portfolios were among the 10 best performers.

Those that underperformed only did so by a small margin, says Backend Benchmarking research analyst David Goldstone. While underlying ETFs in an SRI portfolio typically carry higher expenses because they require more management than a typical index fund, Goldstone says they are performing well enough to offset the cost.

“Investors thus far are not paying a significant performance premium to invest with some values,” Goldstone says.

This isn’t an outlier due to unusual circumstances (like a global pandemic), but a signal of a macro trend in markets, Goldstone says. His data shows SRI portfolios managed by robo advisors also outperformed over longer time periods.

Robo SRI portfolios did more to protect investors from the first quarter market drop than their non-SRI counterparts.

One notable example isWealthsimple’s SRI portfolio, which had the best one- and two-year performance of all taxable portfolios tracked by Backend. The robo designed its portfolios to protect clients in a downturn and the company has seen rapid growth over the last three months, says Sarah Pattillo, Wealthsimple’s communication manager.

“In March, we had twice the number of new clients than we did at the same time last year,” Pattillo says.

One explanation for the outperformance is robos’ SRI portfolios don’t tilt as heavily toward value stocks as standard portfolios, he says.

“Value has underperformed growth going back two years as well as underperformed during this recent downturn,” Goldstone says.

The SRI and ESG field is maturing. As the products get more popular and attract more assets, the quality will continue to improve, Goldstone says.

The robos are evolving as well. The top performing robo during Q1 was Titan Invest, a new entrant which fully allocates to equities. Titan’s algorithms purchased a short S&P 500 fund during the quarter, which returned more than 8% while the S&P 500 was down 13.79%.

“This is a holding we have never seen in any of our robo portfolios before, but it proved quite timely,” Goldstone says.

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INVEST West 2020 Robo advisors SRI ESG Client strategies Portfolio management
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