Paul Williams of Blankstone Sington looks at some of the challenges involved and things to look out for as part of your due diligence process
Managed Portfolio Service (MPS) growth continues apace, both in terms of the number of offerings available, and total value of assets managed this way. How to stand out in this increasingly crowded market is proving difficult.
Little room for cost competition
In its infancy, lower cost options stood out, but the increasing intensity of the competition has driven costs down to minimal levels, leaving little room for further reduction. At the same time most of the larger MPS providers charge similar (low) rates which smaller providers are being forced to compete with, to satisfy cost conscious financial advisers. MPS offerings only utilising low-cost passive funds, such as exchange traded funds (ETFs), are the ultimate endgame to this holy grail.
Specific outcomes vs economies of scale
Some MPS providers have chosen to adopt an outcome orientated approach where the aim is to deliver specific outcomes for investors. For example, this could be a specific income or risk target, quite often over an explicit time frame. The approach makes a great deal of sense for investors who have a financial position that they want to get to at a particular time in their lives. The problem for the providers is being able to offer a sufficiently high number of differently targeted portfolios to cover most of the desired outcomes.
The whole idea of MPS is about benefitting from economies of scale – managing many portfolios in the same way, equals less management time and resources required. The more options you have to offer, the closer you get to the less efficient bespoke portfolio model.
Also, achieving specific investment targets is not easy. It requires sophisticated investment management and risk techniques, and even then, the propensity of markets to deliver ‘black swan’ events more frequently than expected, is a constant threat to the whole stratagem.
ESG no longer in short trousers
Even the new kid on the block – the environmental, governance and societal (ESG) investment strategy – is no longer in short trousers. About a quarter of MPS providers now offer an ethical strategy and this is undoubtedly a growth area. If it follows the path of the fund management industry, then not only will the number of offerings grow rapidly, but even the conventional offerings not ethically labelled will soon incorporate an ethical thread, if they don’t already do so.
What else can help differentiate?
Most MPS propositions populate their portfolios with open-ended funds such as OEICs and unit trusts. Some include passive funds such as ETFs which are a hybrid of open and closed ended. A small minority (less than 10%) have a purely passive approach – this is an area that has grown in popularity mainly because of the low ongoing charges which passives are able to offer. A shrinking minority of offerings utilise traditional closed ended funds, typically investment companies/trusts. Most investment trusts are straightforward portfolios of equities, usually with a geographic focus (e.g., Asia Pacific), a value, income or growth bias, or an industry or topical theme. More recently they have also become popular as the means to gain exposure to illiquid assets such as commercial property and infrastructure. These trusts have a fixed number of shares and are listed on the stock market. It is the liquidity of the shares not the underlying assets that matters. Investors can buy and sell the shares freely on any day the relevant stock exchange is open.
Accessing MPS solutions through platforms rather than directly from discretionary fund managers (DFMs) is now the most popular avenue. For financial advisers looking to outsource the investment management portion of their business it is an efficient way to provide their clients with specialist investment guidance, freeing up the adviser’s time to concentrate on client service and advice, whilst retaining the client relationship. It is easier for platforms to hold larger open-ended funds rather than investment trusts. This is one of the factors behind the content convergence of many of the larger MPS providers. Differentiation has dwindled considerably in this space.
Content is key
Cost and ease of distribution will always be important for MPS offerings, but to stand out from the crowd, content will increasingly be the key. Ethical solutions are attractive for obvious reasons, but their growth in popularity ensures they won’t stand out for long. Including less ubiquitous holdings, such as investment trusts and smaller, niche funds, is one answer, but lack of platform provider flexibility generally means you won’t find the answer there.
Blankstone Sington’s MPS does provide an answer with its templated but ‘bespoke-light’ offering. It is genuinely different to platform offerings and to most direct custody offerings from other discretionary fund managers, because of the investments held.
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About Paul Williams
Paul is the head of the Research Department responsible for Blankstone Singtons’s research and investment recommendations. He also leads the team managing the firm’s Model Portfolio Service. Previously he worked in derivatives for a major commodity importer, and then a Dutch merchant bank.
