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MPS Spotlight: analysing the performance of 10 firms

In the second instalment of our managed portfolio service study, we compare 10 providers and find out about the issues that plague the industry.

Not all MPS are created equal...

In the second instalment of our managed portfolio service (MPS) study, a number of issues were highlighted by the 10 companies put under the spotlight. 

A common perception in the wealth management industry is that investment processes have become too centralised, where firms offer cookie-cutter solutions to clients through their model portfolios. 

If this was the case, comparisons between different strategies should actually be easy, but this is not the case.

However, just like the Financial Conduct Authority (FCA) in its platform study, we found that there is significant divergence. Even when two companies have portfolios labelled 'cautious' that does not mean they will be similar. 

This was the main takeaway from the first part of our research, published in February, and continues to be a problem. 

Yesterday, the FCA pointed out that consumers and advisers find it ‘very difficult’ to compare similarly labelled in-house model portfolios ‘due to limited consistency between platforms in risk labels and descriptions’.

This time, our research also highlighted the issues that wealth firms are facing when putting portfolios on platforms. 

Not all platforms make every product available, such as ETFs or investment trusts, which makes it difficult for MPS providers to guarantee consistency of returns. Therefore some have opted to offer their portfolios only on a handful of platforms, and others offer it directly. 

 

 

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Not all MPS are created equal...

In the second instalment of our managed portfolio service (MPS) study, a number of issues were highlighted by the 10 companies put under the spotlight. 

A common perception in the wealth management industry is that investment processes have become too centralised, where firms offer cookie-cutter solutions to clients through their model portfolios. 

If this was the case, comparisons between different strategies should actually be easy, but this is not the case.

However, just like the Financial Conduct Authority (FCA) in its platform study, we found that there is significant divergence. Even when two companies have portfolios labelled 'cautious' that does not mean they will be similar. 

This was the main takeaway from the first part of our research, published in February, and continues to be a problem. 

Yesterday, the FCA pointed out that consumers and advisers find it ‘very difficult’ to compare similarly labelled in-house model portfolios ‘due to limited consistency between platforms in risk labels and descriptions’.

This time, our research also highlighted the issues that wealth firms are facing when putting portfolios on platforms. 

Not all platforms make every product available, such as ETFs or investment trusts, which makes it difficult for MPS providers to guarantee consistency of returns. Therefore some have opted to offer their portfolios only on a handful of platforms, and others offer it directly. 

 

 

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How does all this impact performance?

One thing our study has made clear is that when comparing performances of model portfolios, the fees and the equity allocation matter.

Among the cautious portfolios that we put under the microscope, are two that stand out which exemplify the gap that can exist between two strategies that carry the same name. 

Thesis' collectives portfolio that sits under the cautious bucket, has an equity allocation of 20% - the lowest among the group of 10. At the other end of the spectrum, Waverton's cautious portfolio has 45% in equities. 

Over five years to end of May, Thesis has returned 24.74% and Waverton has produced 26.41%, which compares to the ARC Cautious index return of 15.69%. Over the same period, the FTSE UK Private Investor Conservative index has returned 33.93%. 

While there is a significant difference between the asset allocation of the two portfolios, the end result is not widely different (see chart next slide). But in terms of the actual risk the portfolio manager is taking, clearly one is higher than the other. 

 

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Top of the cautious table

Tatton Investment Management's cautious portfolio has come out on top in terms of performance over five years. 

The strategy has returned 36.9%, which is more than the ARC and the FTSE UK index. It has done this by having an equity allocation of 40%, which is higher than ARC's bracket of 0-35% in equity. 

Smith & Williamson's defensive portfolio, which has a 30% allocation to equities, came in second place for five year performance.

However, it is also important to note that its performance is presented gross of its annual management charge which is 0.3%. 

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The balanced stars

The portfolios in the balanced category range from a 40% allocation to equity up to 64.6%, which is Smith & Williamson's balanced income portfolio. 

It comes as no surprise that Smith & Williamson's portfolio is the top performer over five years, which returned 50.42% to clients. It is also the only one to beat the FTSE UK Private Investor Balanced's return of 46.31%. 

Over three years, Walker Crips, which has over 60% in equities, is the best performer and also the only portfolio to beat the FTSE UK index return. 

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The growth story

For ARC, anything with an equity allocation of over 75% falls into the category of equity risk. However, out of the 10 companies, there are three portfolios that have over 75% in equities, and three that are right on the cusp. 

Once again, Smith & Williamson's growth portfolio is the best performer over five years. However over three years, Walker Crips comes out on top, returning 34.3% to investors. 

While a lot of what we found out shows that it is difficult for customers to compare and contrast providers, it also means that there are a lot of different options out there than can ceter for a variety of clients. 

So what makes these 10 providers stand out? 

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Waverton has created a very different structure for how it invests money across its five core model portfolios. It uses four Waverton funds as the building blocks for the service: fixed income, core equity, tactical equity and alternatives.

Although all the portfolios invest in these funds, the allocation differs based on the risk profile.

Director Mark Barrington says the company has decided to do this to get around certain restrictions that arise from being on platforms.

‘Our models are on 15 platforms. Not all the underlying funds we’d like to invest in would be available on those platforms. Not all provide access to global direct equities. By using the structure we have, it gives us the opportunity to invest right across the board and you get consistency,’ he says.

The portfolios target CPI plus returns and due to the structure can also invest in investment trusts. 

There is also a variance in the charges.

The managed portfolio service carries an AMC of 1% per year, which goes down to 0.75% if a client is working with an IFA. If the portfolios are accessed through a platform, the Waverton fee is 0.4%.

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Thesis offers clients three different services within its MPS proposition: passives, collectives and securities. Both the passive and collectives ranges have seven risk profiles, but the securities version only offers
five options.

The collectives models are available on seven platforms, with an annual management charge of 0.3% plus VAT. However, the passive and securities models are only available on a few platforms, which include 7IM, Ascentric and Standard Life, because they have no transaction costs.

The MPS currently has around £275 million in assets and the portfolios invest across a buy list of 50 active and passive funds selected by the in-house research team, led by Matt Hoggarth.

‘What’s really funny about our industry is we effectively had a model service 17 years ago, which was on a spreadsheet used for our smaller clients to give them uniform portfolios we could manage on scale. We ended up unitising these clients’ mandates into what at the time were four different funds,’ explains associate director Steven Richards.

‘When we had a fund, not all groups had the capability of launching and managing them, but now that MPS exists any wealth manager seems to be launching a service offering. Where we think we have a unique business is having a couple of decades of experience in this space, but also we do have our Optima funds as well, which gives potential buyers of our MPS a wrapped variant of our models.’

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Psigma’s MPS has been around for a long time, initially launched in 2004 and still run by the original team.

‘There is now an ever-growing number [of MPS propositions in the market],’ says CIO Tom Becket.

‘One of the differentiators for our service is it has been run by the same team and we have a long history of doing so. We put together the service to try and encourage an investment process for our business of having a genuinely institutional approach to private client wealth management.

‘Rather than having a proposition that was built around direct equities and bonds, with
a home bias, our service was genuinely
global and multi-asset, and an institutional way of investing, including having inflation plus benchmarks.’

The firm’s annual management charge is 0.4% before VAT, plus an annual custody charge of 0.12%.

Becket says he was reticent to place the portfolios on platforms unless they could be guaranteed they could get a high replication rate on the funds in the core portfolios.

‘That was important to us because within it we have lots of segregated mandates and funds for Psigma clients, and some niche investments. Then you start having all sorts of issues around differentiation of performance that, for me, is a real no go.’

The MPS originally featured only four models, and later added cautious income and aggressive growth mandates into the mix.

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Smith & Williamson is one of only three companies out of the group to hold investment trusts in its managed portfolio service, which is a differentiator for the company. The service, which was launched in 2012, comprises six model portfolios that levy an annual management charge of 0.3%.

The range is on five platforms. Partner Mickey Morrissey says that because the
firm uses investment trusts, it would not be able to put it on more as the ‘majority of platforms aren’t capable of administering investment trusts’.

The lower risk models have around 15-16% allocated to investment companies, while the Dynamic Growth model has around 30-33%.

Although the service does not have a minimum investment threshold, Morrissey says £10,000 to £15,000 is usually a good starting point.

‘When we decided to put together a managed portfolio service, the way we approached it was different. [We thought] how do we manage money for our traditional core clients and how can we manage in a similar vein, but for a smaller amount? And one of the things was that it would be inconceivable for us not to hold is investment companies,’ Morrissey says.

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City Asset Management has a fairly concentrated selection of model portfolios compared with a number of other providers. Within its MPS there are four portfolios, and the team highlights it does not set out to beat the market, but instead targets inflation plus returns.

‘Inflation plus investing is a real challenge because our benchmarks have always risen in value. This means that preservation of capital is always at the forefront of our minds,’ explains MPS manager Phil Bagshaw.

‘Unlike relative return managers, our benchmarks don’t fall when markets do. This means we are much more prepared to sacrifice some of the available market returns for security. Advisers tell us that this is an approach that resonates with many of their clients.’

The firm’s annual management charge is 0.25% and the suite of funds is available through five platforms. The portfolios are invested in both actively managed and passive funds, and the asset allocation is reviewed every month.

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Tatton’s MPS is the cheapest among its peers it seems, with an annual management charge of 0.125%, which goes up to 0.15% when VAT is included.

‘I set up this business in 2012, with Paul Hogarth, on the realisation that with the emergence of wrap platforms you can run discretionary portfolios similar to how they were run in the private banking world,’ explains chief executive Lothar Mentel.

‘With wrap platforms that is now available to advisers. The problem for advisers was what the incumbent wealth managers were charging for such services, it was so high in total fees.’

The company in total has 24 portfolios that range across six risk profiles, with the option for passive-only, ethical, as well as income mandates.

The range can only be accessed through the 11 platforms it is currently on. Mentel says the reason it is not on all of the platforms is because it is a struggle for all of them to meet the due diligence requirements. However, the size of assets on models the company runs, some £5 billion, gives it negotiating power to get platforms to offer a certain fund if Tatton wants to include it in its models, Mentel says. 

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PortfolioMetrix, which has seven risk-rated portfolios, has decided that doing its own risk profiling would be a better way forward.

According to head of innovation Mike Roberts, the company will engage with external risk profilers, such as Distribution Technology (DT), in the future, but there are a number of things to keep in mind.

He says: ‘Our risk profiling tool goes much deeper than other tools in that it measures many more facets of a client’s financial personality. If a third-party model provider produces models and gets DT to risk rate them, that will deteriorate over time. So competitors keep getting their models remapped by DT every quarter, where a five might move to a six.

‘So [our] MPS is built hand in glove with the in-house tool and they are always in step with each other.’

The ‘financial personality assessment’ uses a combination of behavioural and cognitive psychological theory to determine which portfolio is right for which client.

The firm charges 0.35% plus VAT for the MPS, in line with most of its peers. The portfolios are available on nine platforms.

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Walker Crips’ MPS, Alpha r2, has only been around since July 2014 and was made available on platforms in September 2015.

There are five core strategies and the company levies an annual management charge of 0.7% plus VAT.

While there is a dedicated ethical portfolio, what sets Walker Crips apart is that it screens all of its portfolios for environmental, social and governance (ESG) criteria.

‘We have a minimum level of ESG that we require to see if the company is investable. That’s because we believe that over the longer term, ethical will structurally outperform standard portfolios. We instituted that last year across every single model and there will be an ethical barrier,’ says portfolio manager Gary Waite.

Although he says the firm prefers to invest in direct equities, on platforms this is not possible. Therefore every model has two versions, a collectives-based and a direct securities version.

‘That helps to keep down the costs because we can replicate UK equity income portfolios with our own stocks. We are heavy users of passive investments, buying for exposure in efficient markets.’

The company does not impose minimums, aside from those set by platforms, as it views them as a frustration for IFAs.

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Tacit Investment Management set up its direct MPS back in 2010, but it was only recently put on platforms, back in April 2017.

The direct MPS has a minimum investment of £100,000. Across the four platforms, the minimum is negotiable.

The firm has four model portfolios and through a platform the annual management charge is 0.3%, but when it is accessed direct the annual management charge (AMC) rises to 0.77%.

The portfolios are very focused with an average of 11 holdings.

Leigh Stephens, head of strategic relationships, says: ‘[We invest in] collectives only – we are style agnostic, incorporating both open and closed-ended funds as well as passives, whichever style best meets our tactical and strategic investment positioning. This also creates a lower investment turnover environment, as we are highly focused and conviction-based investors.’

The company is adamant it focuses on long-term goals and does not buy needlessly complex absolute return funds and over-diversify its portfolios like others to manage volatility.

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Canaccord Genuity Wealth Management’s head of intermediary portfolio management team Paul Parker believes the portfolios within the firm’s MPS provide the ‘optimal allocation’ as ‘they are not influenced by the personal opinions of individual fund managers’.

The range has seven portfolios that invest in both collectives and ETFs, with a recommended minimum investment of £100,000. These portfolios can be accessed either directly or through platforms.

The risk categories range from a cash plus portfolio to aggressive growth.

Canaccord charges its discretionary clients 0.75% on the first £1 million, with the fee going down to 0.5% thereafter.

Parker adds: ‘Our MPS portfolios operate under a dynamic asset allocation – meaning we’ll adapt clients’ investments in line with our changing views of the investment market and economic outlook.

‘This can result in a larger weighting in alternative investments (such as commodities, currencies and absolute return funds). These alternatives help to reduce volatility, as they generally don’t move in line with equities and bonds.

‘We diversify the investments within each portfolio and, by taking an open architecture approach, we can select investments from the entire market place, which manages and reduces investment risk.’

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Price should not be everything but it is an important factor for clients. While it is clear that companies are feeling the pressure to lower their fees, this table clearly shows that there is still quite a variety of what firms charge for their services. 

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