Six Park sent an email in June with the subject line 'Why don't we use gold in our portfolios?' In it, the robo adviser explained why it doesn’t include gold in its investment portfolios:

"While we don’t think it’s silly to invest in gold, we do believe there are better asset classes out there for medium- and long-term investors," it said, quoting an earlier blog post.

Do you know which robo adviser does use gold in its portfolios? Stockspot. Founder Chris Brycki has long been a fan of the yellow metal as a portfolio diversifier. This year, Brycki even increased the gold allocation across all Stockspot's portfolios to 14.8%.

In an article (published the same day Six Park sent its email), Brycki said:

"Gold has helped to protect the portfolios during market falls and has been a large driver of why the Stockspot portfolios outperform."

This debate got me thinking…how different are the robo adviser portfolios? Very, it turns out. They invest in passive funds but make very "active" decisions in portfolio construction and asset allocation.

A quick refresher

Robo advice—also referred to as digital advice or automated advice—is a type of digital wealth management that invests you in a portfolio of ETFs based on your risk preferences and goals. 

You won't sit down with an adviser. The entire process is done online without paperwork or office hours. Instead, robo advisers use an online questionnaire to understand your risk tolerance (how you think you would react if the market dropped) and how long you intend to invest. Then, they'll invest your savings in a diversified portfolio.

Portfolios typically include a range of exchange-traded funds, typically tracking global market-cap weighted equity and bond indexes. They expose investors to a range of asset classes such as Australian and international shares, emerging market shares, fixed income, cash. Portfolios are risk-rated, from very cautious, which have more defensive assets such as cash and bonds, to aggressive which have more growth assets, such as equities.

Let's look at how two of Australia's leading robo advisers (and one micro-investor)—Stockspot, Six Park and Raiz Invest—construct investment portfolios. We’ll start with portfolios on offer (1) and then look through asset allocation (2), asset classes (3) and the ETFs available (4).

The asset class risk-reward spectrum

Asset class risk/reward

Source: PIMCO

Under the hood: Stockspot, Six Park and Raiz*

1. Portfolios on offer

Six Park and Stockspot both offer ten pre-made investment portfolios – five "core" portfolios and a matching sustainable alternative for each. Raiz Invest offers seven pre-made portfolios—five standard portfolios, one portfolio with sustainable options, and an eighth customisable portfolio with exposure to Bitcoin (BTC).

*Raiz is a microinvesting platform. You can start investing with a very small amount ($5). They won't walk you through a risk tolerance questionnaire. However, like robo advisers, they place your savings in a diversified portfolio of passive ETFs.

Customisation has become a theme for robo advisers/micro-investors in recent years. Stockspot clients who have over $50,000 to invest can add up to three additional asset classes, country exposures and market sectors to their portfolios (four changes per year). Raiz's eighth portfolio "custom" allows investors to construct their own portfolios from fourteen ETFs and Bitcoin.

These features allow investors to be more tactical with their asset allocation, making changes to their portfolios to take advantage of short-term views of the market. They can also increase (or decrease) the overall risk profile of portfolios.

2. Asset allocation

The question at the heart of portfolio construction is the decision on what asset classes to include, and how much of each. This requires comparing the risk and return characteristics and return expectations of each asset class.

Each provider similarly offers five levels of risk, ranging from conservative to aggressive. Across the highest risk portfolio, Raiz and Six Park offer 'growth' exposure up to 90 per cent. Stockspot's range is narrower with growth assets making up 78% of the Topaz portfolio. Similarly, on the defensive side, Raiz and Six Park growth exposure goes as low as 32.5 per cent and 22.5 per cent respectively, while Stockspot stops at 40 per cent growth.

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When asked about Stockspot’s lower exposure to growth assets, Brycki told Morningstar that he doesn't think investors need to take on additional growth risk to achieve superior returns. He also believes less growth, and as such, less volatility, helps investors keep their cool.

"If you look on a 3 to 5-year basis, our highest risk portfolio, even though it's taken on less risk than others, we've still outperformed," he says. "Our view is that you don't need to give up performance as long as you've chosen the right asset mix and the right underlying investments."

He adds: "Someone may have a long-time horizon, but behavioural studies show that when someone has almost all their money in growth, the likelihood of them making a mistake or not being prepared to hold through tough drawdowns increases."

3. Asset classes

The three providers all offer asset classes most familiar to investors—Australian equities, international equities (developed and emerging market), and Australian bonds. However, each differentiates itself with a specific spin. 

Here's how the portfolios appear for each provider's highest risk option -- Six Park Aggressive Growth, Stockspot Topaz and Raiz Aggressive. The same asset classes are used in the lower risk options with different weightings:

Stockspot

For Stockspot's portfolios, Brycki has selected five asset classes – Australian shares, international shares, emerging market shares, Australian bonds and gold. He says these assets tend to move in different (and complimentary) directions, helping to smooth the portfolio peaks and troughs. He argues that beyond five asset classes, it's difficult to make improvements once you incorporate transaction costs required during periodic rebalances.

Stockspot's allocation to 'gold' is its standout feature. Brycki believes gold is a better defensive diversifier than cash. Neither Raiz nor Six Park has any allocation to gold. Morningstar Investment Management similarly doesn't use gold in its portfolios saying the lack of cash flow makes it difficult to value.

If we look at Stockspot's most high-risk portfolio – Topaz – we see a relatively aggressive allocation to emerging market shares. More than 20% of the Topaz portfolio is invested in companies across developed and emerging Asia, Africa, the Middle East and Latin America. Compare this to Vanguard's total market fund - developed and emerging countries - which has a 10% allocation to emerging markets.

Brycki says that from a global contribution to GDP perspective, investors are likely 'underweight' Europe, Asia and EM following a strong decade of developed market performance.

"These days, emerging markets are around 50% China, 50% other emerging economies," he says. “We would argue that having 10% of your portfolio allocated to the second-largest economy in the world doesn't seem that outrageous given that when people invest in global shares, 70-80% is usually invested in US shares.

"Because of the strong performance of developed markets, people have a bias towards US shares that's probably due to recency bias and a strong decade of performance. "

Six Park

Six Park diversifies across the most asset classes of the three providers, adding global real estate and global infrastructure. They also allocate to hedged versions of the international shares and global infrastructure funds. Co-founder Pat Garrett says Six Park's Investment Advisory Committee believes they've landed on the optimal mix:

"Our investment philosophy on asset classes is you want to have enough to have a prudent growth and defensive mix," he says.

"Having too many can become a law of diminishing returns. Yes, we're on the high end of the number of classes but we like the mix we have.

“You probably don't need more than seven or eight, but you probably need more than four or five."

On Six Park's allocation to global property and infrastructure, Garrett notes that both asset classes suffered in the pandemic, but that they've rebounded, strongly.

"We did a lot of work on global infrastructure and we like it in the portfolio because it demonstrates strong long-term performance, has both growth and defensive attributes and reliable income streams. We also believe it's a reasonable hedge against inflation," he says.

Similarly, on hedged investments, Garrett says this allocation was a sensible choice given the portfolios broad global exposure:

"Given our asset classes include global infrastructure, global property and international shares, there's a reasonable foreign exchange exposure so we made the decision in 2019 to reduce a portion of the exposure by deploying a hedged international Vanguard fund."

Across the three providers, Six Park has the largest allocation to international equities (in the highest growth option).

Raiz

Raiz managing director George Lucas told Morningstar that their portfolios are built specifically for retail investors and as such, are concerned with currency risk and providing broad market exposure.

"We are not for sophisticated investors. We know a lot of our clients are retail investors—so we are concerned about FX risk," he says. "We do overweight our portfolios to Australian assets to remove as much FX-risk as possible."

Raiz portfolios do not include global equity hedged funds. Both Raiz and Stockspot allocate around 50% of their most aggressive portfolios to Australian equities. Six Park is considerably lower at 27%.

Standout allocations belong to region-specific investments including in European equities and large Asian equities. Lucas says he prefers an Asia-specific exposure over a broad emerging market index because Raiz's investors have less familiarity with certain regions.

"If we'd gone for a broader [emerging market] perspective we'd be bringing in more South American and Eastern European exposure which Australian retail investors don't really understand," he says. "Local investors have a much closer understanding about what's happening in Hong Kong, Taiwan and Korea than they do about what's happening in Russia, Latin America, Poland etc."

The only provider to offer Bitcoin, Lucas says this was demanded by clients. He acknowledges that it does add FX risk but points out that the digital currency has added value to the Sapphire portfolio over the last year.

4. Fund selection

One thing that ties the three providers together is a preference for passively managed exchange-traded funds. All the "core" portfolios invest in a handful of broadly diversified, market-cap-weighted ETFs. You won't find actively managed funds or niche funds (thematics) in any pre-mixed portfolios. It's the asset class choices and weighting where they really differ.

Both Six Park and Stockspot have committed to only offering low-cost ETFs to their investors. Asked why they selected SPDR's E200 ETF over BetaShares FAIR ETF for their sustainable portfolios, Six Park said: "It is significantly less expensive than FAIR (at 13bps compared with 50bps)". They also see liquidity, long track-records, significant assets under management and low-tracking error as necessary attributes.

Raiz's Lucas prefers broad indexes, telling Morningstar that he doesn't like "themes" for Raiz's core portfolios.

"Themes tend to be things where people get in at the end, and then the theme stops working," he says. "Retail investors hear about the latest and greatest theme but by the time they get in, institutional money has been in two years prior."

Here are the selected funds and management fees:

5. Sector and geographic exposure

Asset class and ETF selection have led to differing sectoral and regional exposure. Based on a $10,000 in each robo adviser's riskiest portfolio, here's how each is exposed to different geographies and sectors:

Performance

Each provider has its own unique mix of asset classes, weightings and fund selection. But one way we can compare their success is long-term performance. Unfortunately, these can be harder to find than you'd think.

All three providers have disclosed 1-yr and 3-yr performance figures for their core portfolios to 30 June 2021. Longer-term performance is harder to come by for Raiz. Previously known as Acorns, the micro investor has been managing investment portfolios since 2015/2016 but does not disclose 5-yr performance figures.

It's important to note that performance reporting is not standardised across the providers. Raiz, for example, does not disclose if their 1-and-3 year performance figures are inclusive of investment management fees. It is also unclear whether returns assume dividend reinvestment.

Comparing portfolios is tricky as each takes on a different amount of risk – e.g SixPark's balanced portfolio has a 65/35 split between growth and defensive assets while Stockspot's has a 60/40 split.

The five Morningstar Multi-Sector indices and categories are often used for benchmarking ranging from Conservative (low-risk) to Aggressive (high-risk). Morningstar Categories are close peer groups of managed funds.

Indices: Morningstar Aus Msec Conservative TR AUD, Morningstar Aus Msec Moderate TR AUD, Morningstar Aus Msec Balanced TR AUD, Morningstar Aus Msec Growth TR AUD, Morningstar Aus Msec Aggressive TR AUD Categories: Multi-Sector Conservative, Multi-Sector Moderate, Multi-Sector Balanced, Multi-Sector Growth, Multi-Sector Aggressive

As most robo advisers talk about managing risk, it's important to look at performance during their worst months. Raiz is similarly cagey about its monthly performance data. Stockspot disclosed month-end returns on some of their portfolio for March 2020 (when asked by Morningstar) but not all. Only SixPark has published its month-end figures in full (and does so regularly):

Conclusion

Is gold a better defensive asset class? Is currency risk so great that I should keep most of my assets at home? Should I have two asset classes, or five or ten?

Unfortunately, there are no easy answers to these questions. While each provider has their view, there is no 'standardised' or 'perfect' asset allocation to compare their portfolios against. Everyone has a different idea about what will make the most efficient portfolio. Plus, investment markets are constantly changing; the riskiness or defensiveness of an asset class and its correlation to other asset classes is not static.

What's clear is that each provider has a very different approach to asset allocation and you'll need to make a choice. The best thing a retail investor can do is to consider their own financial goals (and time horizon), understand the risk-return characteristics of the various asset classes and align themselves with a provider that is transparent, helpful and trustworthy.

Investment options are only one thing to consider alongside fees, accessibility, minimum investment, fund operations and customer support. 

Charts may appear different on mobile.