Revealed: the opaque world of managed portfolio services

In this investigation we cut through the haze, find the managed portfolio services' core products and, for the first time, enable investors to truly compare the options on offer from 10 leading providers

 

When it comes to managed portfolio services (MPSs), understanding what is actually on offer is a daunting task. It is impossible to compare the vast variety of providers on a like-for-like basis.

Providers use different benchmarks for performance comparison and they present breakdowns of charges in different formats. Worse still, what one firm calls conservative easily becomes another’s balanced. And once you start digging into the details and compare their asset allocation, it becomes clear managed portfolio providers have a labelling problem. No wonder people are confused.

In this investigation we try to cut through the haze and find the firms’ core products. For the first time we enable investors to truly compare the options on offer from 10 leading wealth firms.

For performance comparison, we take Asset Risk Consultants’ indices as a basis, to 31 December 2017. Most MPSs have more than three portfolios on offer. But we will focus on the key cautious, balanced and growth categories, deciding which portfolio falls under what category according to its asset allocation, regardless of the portfolio’s name.

 

When it comes to managed portfolio services (MPSs), understanding what is actually on offer is a daunting task. It is impossible to compare the vast variety of providers on a like-for-like basis.

Providers use different benchmarks for performance comparison and they present breakdowns of charges in different formats. Worse still, what one firm calls conservative easily becomes another’s balanced. And once you start digging into the details and compare their asset allocation, it becomes clear managed portfolio providers have a labelling problem. No wonder people are confused.

In this investigation we try to cut through the haze and find the firms’ core products. For the first time we enable investors to truly compare the options on offer from 10 leading wealth firms.

For performance comparison, we take Asset Risk Consultants’ indices as a basis, to 31 December 2017. Most MPSs have more than three portfolios on offer. But we will focus on the key cautious, balanced and growth categories, deciding which portfolio falls under what category according to its asset allocation, regardless of the portfolio’s name.

Brewin Dolphin and Charles Stanley come out on top

The most significant performance has come from Charles Stanley and Brewin Dolphin's portfolios. However, it is important to note that Brewin Dolphin's Balanced portfolio has been put in the growth category, as it has an equity exposure of over 66%.

Over five years this strategy returned 65.10% compared to the ARC Steady Growth average of 47.6%. Charles Stanley's Total Return 4 portfolio, which has about 72% in equities through a number of growth and income strategies, has returned 65.40% over five years. 

**Brewin Dolphin charges and performance vary according to the platform. Performance figures based on Elevate platform.

Over five years to 31 December 2017, the portfolios that have been featured in the balanced category have all outperformed the ARC Balanced's return of 35%. The results range from Close Brothers' Conservative portfolio return of 35.40% to Whitechurch Securities' Risk Level 5 portfolio return of 47.90%. 

The portfolios that fall under ARC's Cautious category have all mostly performed above the index. The only exception is Hawksmoor Defensive over five years, which is only slightly under (by 0.1%) the index's 21.8%. Over three years, the only portfolio that falls behind is the Whitechurch Securities Risk Level 3, which returned 9.3% to investors compared to the index's 10.6% return. 

Following are summaries of the MPS' offered by the ten discretionary managers and what differentiates them. 

TABLES DISCLAIMER

All performance figures are net of fees, with the exception of Brooks Macdonald, Brewin Dolphin and Brown Shipley, which are net of underlying fund charges but gross of management charges. Quilter Cheviot's are net of underlying fund charges but gross of management charges **Brewin Dolphin charges and performance vary according to the platform. Performance figures based on Elevate platform. ***The reason a number of portfolios’ names do not match the category they are in, such as Quilter Cheviot’s Balanced portfolio and Close Brothers’ Balanced portfolios in the growth category, is because of their asset allocation. The buckets have been determined based on the equity exposure of the portfolios when compared to the relevant ARC indices, through the Suggestus Performance QuickCheck tool. Source: Companies’ factsheets

Britain is not noted for its customer service, but chief investment officer Daniel Lockyer thinks Hawksmoor is an exception.

‘There’s an emphasis on service and transparency,’ he said. ‘We want to be seen as someone advisers can trust and form a good relationship with.’

So portfolio changes are explained when they happen, not just in monthly factsheets which come out soon after the month ends.

Hawksmoor avoids a target volatility approach to portfolio construction because Lockyer believes it is too hard to predict future volatility based on past figures. Instead, he advocates a ‘common sense’ approach to risk.

Lockyer emphasises the need to adhere to industry recognised risk ratings, but adds: ‘We try to think about risk in terms of how it would affect portfolio performance in the future, rather than simply looking at backward measures and volatility.’

This approach is evident in its Japanese equity exposure. ‘If you looked at the historic volatility of a Japanese equity fund, it would probably come out as high risk. But we have Japanese equities even in cautious portfolios, as we think they are cheap and have prospects for good future returns.’

‘The size, depth and experience of our fund research team is probably much greater than our competitors,’ said David Hood, head of investment solutions at Brewin Dolphin.

This means the firm can ‘really drill down into the underlying assets in funds’, added Gareth Johnson, head of digital channels and investment services. ‘We look to see where managers get their alpha from.’

For Johnson, the two main factors that set Brewin Dolphin apart are ‘transparency of holdings and transparency of process’.

The analysis begins with a quant screen where the team looks for managers with persistent risk-adjusted outperformance.

Meetings are then set up with the most promising funds. ‘Outperformance needs to come from a repeatable process and not just one or two stock picks,’ added Hood.

Selected funds are then monitored, with analysts meeting fund managers once or twice a year. Meanwhile, separate factsheets are provided for different platforms, and these give full disclosure of portfolio holdings.

The asset allocation team meets monthly. ‘This sets us apart, as competitors typically rebalance quarterly,’ said Johnson. ‘That means we aren’t trying to forecast what may happen in the next 12 weeks.’

Monthly meetings allow for quicker responses when there is a change, such as analyst downgrades or manager departures, at the underlying funds.

The DFM offers five managed portfolios. These include a global equity portfolio and an income fund.

The Dynamic model portfolios of Whitechurch Securities have just passed through their fifth anniversary and, according to chief executive Gavin Haynes, they ‘have delivered very pleasing risk-adjusted numbers’ over that time.

Sitting within its portfolio management service, there are 11 strategies, including an ethical balanced model. The risk profiles range from three out of 10 (defensive) to eight out of 10 and they all invest across a range of collective investments, investment trusts, and exchange traded products (ETPs). Five of the portfolios have been rated by risk consultants Distribution Technology.

‘One of the key drivers of this impressive performance lies in the Dynamic portfolios’ flexible investment approach,’ Haynes said. ‘What separates the Dynamic model portfolio range from its peers is the ability to hold up to 20% of the portfolios within actively managed funds. The remainder of the portfolio is invested within passive index-tracking funds, which ensures that costs remain exceptionally low.

‘It provides us scope to invest in areas and strategies that a passive portfolio cannot, with a view to enhancing returns, whilst maintaining a very low cost charging structure.’

Tilney offers a number of different ways to access its discretionary investment management service. Aside from the bespoke service, it also lists ‘Model Portfolios on Platform’ and a ‘Managed Portfolio Service’ as alternative offerings.

The model portfolios are available to advisers and their clients with a minimum investment of £10,000 and they are on 10 platforms. The investment manager on the range is Bevan Blair, who joined Tilney through its acquisition of Ingenious in 2016.

There are five risk-based models sitting alongside the Strategic Income and Income & Growth portfolios. Each model has a benchmark of cash and invests across a number of vehicles, including investment trusts and ETFs.

Meanwhile, the MPS is available from £50,000 and on the firm’s own in-house custody platform. The strategies are actively managed and can be held across all tax wrappers.

Brooks Macdonald offers eight risk-rated active MPS portfolios. ‘This differentiates us from those MPS providers who offer just five risk-rated model portfolios,’ said Jonathan Webster-Smith, lead manager of the MPS and multi-asset fund range.

This extra flexibility means Brooks Macdonald has two low to medium risk portfolios (one income, the other income and growth), two medium risk strategies (income, and income and growth) and two higher risk ones (growth, and income and growth). ‘So you can have the same risk parameters, but with different fund objectives’ said Webster-Smith.

The portfolios are available on a large number of platforms, as a custody service, and as multi-asset units. ‘This means all adviser clients, whether using MPS or multi-asset units, get consistent results,’ said Webster-Smith. ‘We are not trying to tell professional advisers what service to use.’

He said the investment team has total accountability as ‘professional advisers can speak to people who make the investment decisions’, and it is willing to make bold calls. ‘We’re happy to have zero weightings to asset classes, such as property, gilts, hedge funds and resources, if we believe that’s the right thing to do,’ he said.

He added he is willing to hold passive funds in the actively managed MPSs, while offering access to a wide range of asset classes, including convertible bond funds and structured products.

In terms of investment style, Webster-Smith said: ‘We try to deliver consistent returns over time through gradual changes of 1% to 4% in any one month. You’re trying to make smoother changes so clients don’t experience unnecessary volatility.’

By offering a comprehensive range of 10 risk-rated portfolios and two income strategies, ‘we can service a very wide range of client needs,’ said Alex Brandreth, deputy chief investment officer at Brown Shipley.

‘We cater for clients wanting preservation of capital and those wanting to outperform global equities.’

Brandreth said Portfolio 1 is ‘cash-like’, while Portfolio 10 has a heavy weighting to international equities. This divergence is also reflected in the two income portfolios.

The Defensive Income 1 portfolio is focused on capital preservation, with holdings in corporate bonds, gilts and defensive equities. Income 2 seeks to outperform global equities and holds high yield, emerging markets bonds and equities, and global income funds. The model portfolios are available on five platforms.

He said Brown Shipley can negotiate cheaper share classes on its underlying funds. It does so by leveraging the combined purchasing power of its bespoke clients and those using the MPS.

Brown Shipley is whole of market. ‘Some platform MPSs use their own funds; we allocate to third-party managers we believe are best in class,’ said Brandreth.

Charles Stanley offers 10 multi-manager portfolios split equally between total return and income. Working closely with the company’s collectives research team, the portfolio managers use a strategic asset allocation model as the starting point.

‘Our comprehensive suite of model portfolios are powered by the extensive research of our specialist collectives research team combined with an actively managed asset allocation, determined by the 16-strong team of experts which make up our investment strategy committee,’ said Christopher Aldous, head of asset management.

‘The models are unconstrained by traditional benchmarks, allowing us to maintain a flexible and transparent approach enhanced by access to market-leading fund managers. We use a unique blend of active and passive investments so we are able to generate the best returns for our clients at a competitive price.’

Although the models invest predominantly in active funds, when necessary they will hold passive index tracking funds.

Quilter Cheviot launched its managed portfolio service back in 2001 and currently has seven strategies sitting within it, offering a range of risk profiles plus income and growth options.

Investment manager Anthony Webb said: ‘We build portfolios that financial advisers and clients can trust. Our cautious and conservative models were launched in June 2005 – prior to the financial crisis – and throughout their history these models have never experienced a negative three year return (gross of management fees, with all income reinvested.)’

The investment team adopts a three stage approach to constructing portfolios: strategic asset allocation; tactical asset allocation; and fund selection. From a universe of 17,000 funds, Quilter Cheviot creates a buy list of approximately 250.

‘Being able to demonstrate our track record of consistency and reliability throughout times of extreme market stress is a unique selling point for the service,’ Webb said.

‘Quilter Cheviot offers seven individual in-house MPS strategies which are designed for a wide range of risk profiles. All of our higher risk strategies have delivered increasingly more return with more risk.’

Clients receive a summary on the strategies every six months, which includes an itemised portfolio valuation, performance report, transaction schedule, capital and income statements as well as the market commentary. In addition, monthly factsheets are provided for each individual strategy.

The portfolios are available to advisers either through eight platforms or direct from Quilter Cheviot. The Cautious portfolio is not accessible through platforms however. On platforms, the company charges a portfolio management fee of 0.30% plus VAT for the six strategies that are available. The minimum investment depends on the platform.

The in-house strategies charge an AMC of 0.85% plus VAT and no additional custodian fees apply. 

‘Active’ is the watchword for GAM. ‘We’re active in asset allocation and fund selection,’ said investment director Charles Hepworth. ‘This year, around two thirds of outperformance has come from fund selection and one third from asset allocation.’

Indeed, the GAM MPS range only holds one passive vehicle, a gold exchange traded fund (ETF). ‘We prefer to find active managers who deliver alpha,’ said Hepworth. This active approach does, though, have an impact on charges. ‘We’re not the cheapest out there. Some managers can charge less than 1%, but it’s hard for us to get near that.’

Indeed, the lowest fee is a 1.26% capped total expense ratio (an all-in fee that includes underlying fund charges). But Hepworth said GAM is ‘competitive on fees’ for an active house. The firm does not have a minimum investment for the Z share class which it says is the predominant one used in the UK.

Key to GAM’s approach is investing in more unusual assets. ‘The use of instruments in our portfolios is different from our peers,’ he said. ‘I’d like to think we invest in funds that aren’t widely used.’

So the defensive portfolio makes relatively small use of gilts and corporate bonds, instead holding ‘lots of esoteric fixed income’, such as junior financial bank credit.

The model portfolios are all rated by Distribution Technology (DT), although it does not offer the full 1 to 10 DT range. ‘We go from 3 to 7,’ Hepworth added, ‘You don’t get much client demand at the extremes.’

What is the ‘Close Score’ you ask? Well, it is the proprietary risk-grading system that Close Brothers has developed for fund selection, which monitors manager and fund performance.

Introducing Close’s MPS, investment manager Sam Grant-Dalton said: ‘The MPS offers investors an opportunity to focus on income, growth or a blend of both, in line with their appetite for risk.’

The wealth firm has kept its offering quite concentrated, rolling out only four portfolios within this service: income plus; conservative; balanced; and growth.

Grant-Dalton added: ‘The portfolios have a quality bias selection process and long-term conservative approach to investment. MPS benefits from institutional quality research and a robust investment decision-making process. We adopt a team approach between our investment and research teams, which ensures the best ideas and a long-term partnership with our managers.’

All the portfolios have outperformed their respective ARC benchmarks over three and five years. According to the latest commentary, the managers continue to remain overweight equities across the board and underweight fixed income.

They noted: ‘December was a favourable month for all asset classes. The UK funds bounced back in December after a subdued November, helped by the UK government finalising key divorce terms with Brussels. ‘Overall, exposure to Europe and the US had a positive contribution to portfolio performance.’

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