Covestor Review: Active Investment Management

Covestor Review

Covestor finds a portfolio manager suited to your investment philosophy and automatically follows the trades of that manager on your behalf. You can tailor the service to suit your investment needs. At its heart, Covestor is a company that pairs you up with active investment managers based upon how much you can afford to invest, your risk tolerance, and specific asset classes.

Maybe you are a very safe investor. Your money is in a low fee index fund and has been nicely allocated across a broad range of investments. Perhaps you’re using MarketRiders and faithfully reallocating your money every quarter when you get an email from them. Maybe you have been working with an advisor from Personal Capital who is helping you safely put your money into a diverse portfolio. But there’s a small part of you that thinks someone out there is smarter than the market and you’d like a piece of the action. If you have a little bit of money to put at risk and you haven’t found a Motif that you like, Covestor could be the place to put your money.

At Covestor, you get to follow the trades of active investment managers who have been screened by the company. These managers have various investment philosophies and portfolios. Covestor allows you to automatically make the same trades as these managers. It feels like GuruFocus without the Gurus.

Let’s look at the company’s investment philosophy as per their site:

Our investment philosophy
We believe you deserve a better way to invest:

1. Asset management should start with the individual needs of the investor. As investors’ needs are as varied as investors themselves, no single approach – or computer algorithm – satisfies everyone’s requirements.

HB Comments: This is true. I agree. We are all in different situations that require different allocations of money and liquidity. Identifying a good advisor is helpful, but Covestor seems rather impersonal. This statement advocates a personal touch, but Covestor is really using software to narrow down potential advisors who you won’t actually meet. Instead you will see if you agree with their philosophy and then have Covestor mirror their trades. If you want more personalized service but want a lower cost then you should consider Personal Capital.

2. Active portfolio management, including periodic rebalancing, plays an important role in risk management, which can significantly enhance investor performance over an entire market cycle.
HB Comment: In my book, rebalancing is not “active portfolio management.” It is a method to ensure that you get the maximum return based on your risk tolerance. Market changes cause your portfolio to become misaligned from your optimal risk profile. Therefore, it is imperative to rebalance. That’s not active portfolio management though.

3. Passive index funds, including index ETFs, enable individual investors to gain broadly diversified exposure to entire asset classes at very low cost. Most investors should use passive indexing strategies for their core equities and fixed income allocations and should consider active approaches to round out a strategy, in line with their investment goals.
HB Comment: Excellent. Totally agree. Here are a few places to find passive investment opportunities at a low price.

4. A financial adviser can help individuals make the right decisions for themselves, including selecting portfolio managers who can help them reach their financial goals.
HB Comment: What I get from this is that Covestor considers itself to be a financial adviser. That’s reasonable. They are trying to match you up with good investment opportunities for a fee.

5. Investors deserve fully transparent accounts, clear performance and risk reporting, understandable language, and no hidden fees. Securities should be held in investors’ own brokerage account as, after all, it is their money (we believe in separating advisery from custody services).
HB Comment: I like this a lot. The transparency provided by Covestor is far and away the best thing about the site. You get the full history of the active money managers along with straightforward information about minimum investment requirements and fees. I also like that they allow you to mirror an investment manager without actually giving the manager all of the money. This gets to the heart of their service and is their greatest strength.

6. Many investors have a viewpoint on economic trends at the macro or sector levels that they wish to express through their holdings. Active management via a portfolio manager who shares their particular viewpoints and convictions allows for such directed investing.
HB Comment: Right. It’s active management. You must hope that this person knows something that you don’t know and that the market hasn’t figured out yet.

7. Emerging fund managers with fewer assets under management tend to outperform their peers at larger, older funds, due to the greater opportunity set available to the emerging manager. We therefore seek to identify talented emerging managers and to offer our clients unprecedented access to their strategies.
HB Comment: This is where they differ from GuruFocus. Covestor is looking more at finding emerging talents. You might find a Guru before they become a Guru. I read this and thought, “Meh.”

8. Not all great portfolio managers work on Wall Street. The internet allows us to source, vet and grant access to compelling investment strategies from portfolio managers across the globe, including those with extraordinary domain expertise and local market intelligence.
HB Comment: So maybe you can find someone in India who will give you better information on India than Goldman Sachs. Plus, if you could afford Goldman Sachs, you probably wouldn’t be on this site reading about Covestor!

9. The recent, broad rush into index investing products creates additional opportunity for talented active managers to find market inefficiencies.
HB Comment: It also creates opportunities for those managers to fail.

10. Regular commentary from portfolio managers provides clients valuable insight and transparency on their portfolio status and changes.
HB Comment: No argument there. You want to hear frequently from your portfolio manager and understand their philosophy and where they are going.

I think if I were going to use Covestor, I would probably try to find someone who uses a Black Swan investment methodology to hedge against the catastrophic risks. I’d remember that this is probably not for all of my portfolio and I’d keep most of my money in the good old fashioned index funds.

Have you tried Covestor? I’d love to hear what you think.

MattCovestor Review: Active Investment Management