You know what annoys and frustrates me? Lack of transparency, and lack of value-add from money managers. A case in point is Betterment’s new portfolio options. But you’re in luck, one service I believe I can provide you with is to peel back the investment-speak, cut through all the crap and determine whether there is any real value for you.

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Betterment Portfolio

Are you a Betterment investor like me? it you’ve read about my portfolio you will know that I have a modest allocation to Betterment. I quite like their portfolios, but for reasons I describe in that post I will probably be moving slowly away from them.

However they have released three shiny new portfolio enhancements:

1. Socially responsible Investment Option
2. BlackRock Target Income
3. Goldman Sachs Smart Beta

Pretty impressive stuff huh? That is some big-name, smart-suit, fast-car shit!

Let me try and cut through the noise though and tell you what you need to know.

1. Socially Responsive Investments (SRI)

You can easily Google what SRI is, but in a nutshell it is restricting the investments in the fund to those companies that are not too evil. This is assessed against three pillars; Environment, Social and Governance. So for example they have kicked out BP on environmental grounds, eliminated Philip Morris for obvious reasons, and kicked to the kerb Walmart and Pfizer for social and/or corporate governance reasons.

Sounds like a good thing, doesn’t it?

It certainly is great in principle but may not be that great in this particular implementation. Betterment have found that they can only implement SRI for US large cap equity strategies, and this forms only about a quarter of a typical Betterment portfolio. The other asset classes of international equity, mid-cap equities, emerging markets and bonds will not be SRI. So be aware most of your investments will be unchanged.

Note that from an investment perspective the behavior will be almost identical. In Betterment’s white paper the backtested returns had a correlation of 0.9979 (i.e. almost indistinguishable) and the forward looking risk and returns looked impossible to separate to me (even when squinting hard). So this means your portfolio should behave pretty much the same. But is that good or bad? I guess it’s good in that you won’t see much of a performance hit, but bad because if there is no difference in the performance characteristics, then there can’t actually be much difference in the underlying portfolio. And so if there is little difference you have to question the SRI impact.

And that’s really the problem. From an SRI perspective it does not move the needle. It might make you feel a bit better, but it’s not a material move for your portfolio. If you really want to go down the SRI route then check out some other passive vehicles on Vanguard or other platforms.

Oh yeah – it will also cost you more. Fees will increase anywhere from 0.05% to about 0.10%, depending on your equity allocation.

For me it’s a pass. I’m looking at re-vamping my charitable giving, and that will be my SRI contribution but this Betterment addition only helps with the feel-good factor.

2. BlackRock Target Income

This is a bond fund designed to protect capital and pay an income and Betterment suggests it is ideal for retirees.

I confess I really couldn’t understand the blurb on this. Unlike the white paper for SRI the text is rambling with some assertions about enhanced return – but does not really justify where that additional return coming from. It is very waffly with lots of generalities and very little specifics. I really don’t think it is too much to expect for an investor to be given a clear description of the new funds; the asset classes (credit bonds, Treasuries, high yield etc), benchmarks (Barclays aggregate etc), duration (4 years etc), average credit quality (investment grade, 20% high yield etc), absolute performance and performance against comparators. This is basic blocking and tackling for communicating to investors.

So I ran out of patience.

But… I think it’s basically as simple as giving investors the option to invest in BlackRock actively managed bond funds with various levels of risk and return. Since its actively managed you will pay about 0.14%-0.22% more in annual fees.

Most financial independence enthusiast will have turned the page at the mention of active management, but I am ok with active bond management (reasons for another post). But due to the shoddy lack of transparency on this – it’s a pass for me.

3. Goldman Sachs Smart Beta

Wow! Is there anything more sexy sounding than “Goldman Sachs Smart Beta“. Just say it and picture yourself on a yacht in the Mediterranean with a Campari & soda on ice yelling “Goldman Sachs Smart Beta” to your broker on your iPhone X.  Feels good huh?

I don’t want this article to turn into a long explanation of what smart beta is, but if that floats your boat then shout in the comments below, and I’ll do a separate post on it. Suffice to say that the investment industry has been in luuurve with smart beta. It sounds smart, taps into investor’s FOMO fears, and allows managers to create funds that are essentially passive, but with active fees.

Look, I’m being harsh.

There is some academic evidence that smart beta is a thing, and it’s probably not a bad thing. But what kind of thing is it?

Passive investing (e.g. putting all your money in index funds at Vanguard) is following the market. Smart beta says that different bits of the market are more advantageous than others. You know all the dividend guys? You know, the ones that rave about dividend producing stocks? Well that’s an example of smart beta. They have carved out that bit of the market because they think that is more optimal.

But there are all sorts of niches you can carve out. The most fascinating niche in my view is “low volatility” stocks. There is some evidence that the market does not value the stocks that plod along, and these are under-priced. I have a small allocation to VMVFX which is the Vanguard low volatility fund, so I dabble a bit, but I’m a weak person. Don’t follow me.

You know the phrase – if you don’t understand it then don’t invest in it? Well it applies here. If you find this bewildering, then move on.

But if you are prepared to do 30 seconds more study then look at the following chart below that shows the best performing factors year by year. The index fund is the grey square. You’ll notice that the grey square has never been at the top in any year, and is mostly middle of the pack or towards the lower half. So in theory you could have done better with some kind of funky smart beta strategy, but you could also have done worse if you had chosen the wrong factors.

Basically this is a shiny distraction from the investment industry. It may provide some value, it might not. But don’t let these things divert you. Ultimately it’s unlikely to impact your numbers in any meaningful way, and there are better ways to spend your time in optimizing your path to financial independence.

Before we end I just want to highlight one final paragraph from the Betterment note on this strategy.

The Goldman Sachs Smart Beta portfolios examine market capitalization, rates, emerging markets, credit, equity style, commodities and momentum to seek to avoid taking unnecessary risk while pursuing the best opportunities to drive portfolio returns.

You might have missed it, but this rings alarm bells for me. All of the paper seems to discuss equity investing, and then here they have mentioned rates and commodities. How does that fit into things? I acknowledge that you can have smart beta in rates and commodities but it seems to be a weird inclusion buried at the bottom. So there are perhaps two options:

1. Betterment included the Goldman Sachs blurb without bothering to read and amend it.
2. The strategy does include some rates and commodity smart beta strategies, but they were strangely silent on this issue.

You might think this is a small thing, but it’s not. The only way to pin a money manager down is close reading and analysis of what they produce. They will tell you what they want you to hear, and that is generally all rainbows and unicorns.

I thought the SRI paper was quite transparent but the smart beta summary is woefully lacking in detail. For example, I’m still not clear about whether it is actively managed, or a rules-based (essentially passive) approach. The fee leads me to the latter.

So for those reasons – it’s a pass from me.

There you have it folks, a quick summary of the three new options from Betterment. So much of the money management industry is based on style over content and I feel that style won the day today.

What do you think? Was I too harsh? Did I fail to cut the cr@p and in fact added even more cr@p?  Give it to me straight folks.