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Despite Q4 stock slump, several US robo-advisers boosted AUM in 2018

Quarterly disclosures from several companies suggest that S&P Global Market Intelligence's market forecast for the retail U.S. robo-advisory space is on track. Our model assumed assets under management would continue to climb, even in the face of a challenging stock market environment, due to user growth.

Robo-advisers were not immune to the market swoon of late 2018, with the fourth quarter taking a toll on portfolio values. For instance, the leading independents — Betterment LLC, Wealthfront Inc. and Personal Capital Advisors Corp. — saw declines of 6%, 8% and 4%, respectively. But overall their portfolio values were up for the year, even as the S&P 500 and Dow Jones Industrial Average closed out 2018 in negative territory.

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These portfolio values come from 13F filings, which are quarterly documents that list the securities held by asset managers. These filings can be a useful gauge of a company's AUM, despite some limitations. A company's reported year-end AUM often ends up being larger, since there might be some securities it was not required to report on 13F and the timing of the AUM disclosure might not line up exactly with the year-end date.

Based on these quarterly disclosures, our annual projections appear to be holding up fairly well. For instance, our 2018 AUM forecast for Betterment is about 1.1x the portfolio value it reported as of Dec. 31, 2018, in its 13F filing. This was in the same ballpark as Betterment's ratio for 2017, which is a good sign.

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One of the areas where our model might have fallen short, however, was in predicting NextCapital Group, Inc.'s AUM. We estimated that the company, which launched in February 2014, would have roughly $400 million in AUM at the end of 2018. But it seems to already be way past that mark, reporting over $650 million in portfolio value in its 13F filing.

As noted above, our estimates factor in the hefty account growth that independents have been achieving. Betterment's discretionary accounts jumped 47% in 2017, while Wealthfront's grew by an even larger percentage at 140%. This robust account growth likely continued in 2018 and probably offset portfolio losses for the year. Assuming no changes to the positions reported at the end of 2017, all three companies would have seen declines in their portfolio values in 2018. But instead they climbed. Additionally, the number of positions was higher for all three companies at the end of 2018 versus the end of 2017.

The portfolios of Betterment and Wealthfront remained heavily invested, as of Dec. 31, 2018, in the Vanguard Index Funds - Vanguard Total Stock Market ETF, which seeks to track nearly the entire U.S. investable equity market. That ETF accounted for roughly 21% of Betterment's total portfolio value at year's end and 11% of Wealthfront's.

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Betterment, Wealthfront and Personal Capital have significant non-U.S. exposure as well, but that did not provide a safe haven in the fourth quarter either. Betterment's second-largest reported position was the Vanguard Tax-Managed Funds - Vanguard FTSE Developed Markets ETF, which tracks companies in Canada and the major markets of Europe and the Pacific region. That ETF, which accounted for 17% of Betterment's total portfolio value, slid approximately 14% in the fourth quarter.

The top stake for both Wealthfront and Personal Capital was the Schwab Strategic Trust - Schwab International Equity ETF, which tracks the same index as the Vanguard FTSE Developed Markets ETF. That ETF, which accounted for roughly 11% of Wealthfront's total portfolio and 12% of Personal Capital's, shed 15% in the fourth quarter.

In addition to pressuring AUM values, continued market declines could lead to a loss of existing customers and fewer potential customers. As we have discussed in prior reports, the independents are already facing increased pressure from large incumbents, and there have been a few instances already of startups exiting the market.

We are also wary of giving too much weight to user growth, even though it is a common focus in the tech world, based on Hedgeable Inc.'s trajectory. Hedgeable's CEO, speaking at S&P Global Market Intelligence's Fintel Intel conference in December 2017, indicated that he viewed the size of its user base as a more important metric than AUM. But by August 2018, Hedgeable had discontinued its regulated investment management business. In a message to investors, representatives stressed that the company "is not shutting down, selling, merging, filing for bankruptcy, or insolvent" and it is difficult to say for sure what prompted the move. But based on its public disclosures, Hedgeable did not accumulate assets as rapidly as companies like Betterment and Wealthfront, nor did it raise as much capital.

Our market forecast model continues to focus heavily on AUM and, for the moment, our estimates appear to be on track. But we will continue to keep a close eye on the global trading environment, as a prolonged bear market might temper our expectations.