How to make the most of multi-manager and discretionary portfolios

Multi-manager funds and discretionary portfolios let investors outsource the tedious work of selecting individual funds into the hands of industry experts. 

Both of these solutions offer a collection of funds, selected by a manager and monitored regularly. However, they come with different benefits and costs. 

In a guide for discretionary management published earlier this year, Fraser Donaldson, insight analyst for funds at Defaqto, says discretionary management can come in three types: bespoke segregated portfolios tailored to the individual client, managed or model portfolios, which adhere to a specific risk profile, or unitised model portfolios, which are often, but not always, multi-manager funds. 

While discretionary fund management (DFM) has traditionally been the realm of the rich and famous – or someone with more than £50,000 in a lump sum investment – the service has become more widely available through the use of model portfolios listed on platforms.

Private investors are able to access discretionary and platform solutions directly via funds supermarkets and platforms or directly from the provider. 

The key difference between multi-manager and discretionary offerings is cost.

Traditional bespoke discretionary services tend to be available with a minimum investment of £50,000 – although quite often this level is significantly higher – while many multi-manager funds are available from between £500 and £1,000. 

"Most names you would be able to go directly through, but for a much higher minimum," Donaldson said.

"Bespoke at the very minimum is usually £100,000, but it is often more likely to be at least £250,000. Usually the higher your minimum initial outlay, the more types of investment are available." 

Investors can also access discretionary services through model portfolios listed on platforms for a minimum investment of £1,000. 

FE Trustnet will look into the pros and cons of model portfolios in a subsequent article this weekend. 

Arguably the greatest benefit of using discretionary services over multi-manager funds is the ability for investors to customise their own portfolio, which would then be run by an individually appointed manager. 

The client is given direct access to the portfolio manager, who runs the investment according to a pre-agreed benchmark and tailored to the needs of the client. 

Donaldson says that good places to look for wealth and discretionary managers are through organisations such as the Association of Private Client Investment Managers (APCIMS), which has an online listing of providers.  

"With traditional bespoke services, you sit down with the investment manager and discuss your needs and goals. There are no two portfolios alike," he commented. 

However, bespoke services are rarely, if ever, offered to investors with less than £50,000.

Instead, anyone who has less than this amount to spend can choose from a range of typically risk-rated models to fit their preference, rather than specific investment needs. 

Donaldson says a good middle ground between fully bespoke portfolios and model portfolios or multi-manager funds is a managed portfolio service, in which a discretionary manager runs a range of three to seven portfolios that are benchmarked against cash plus a defined percentage, and tend to stick within a risk range. 

"Anyone who goes into managed portfolios gets the same thing, a bit like a multi-manager fund," the analyst continued. 

Managed portfolios range from a minimum investment of £10,000 up to £50,000.

Donaldson says multi-manager funds are often a notch below managed portfolios because they operate as a fund, rather than a collective investment proposition.

However, he points out that multi-manager funds can have certain tax benefits when trading because they are not susceptible to capital gains tax. 

"If you sold something in a discretionary portfolio, there is the immediate potential liability for capital gains. In multi-managers there isn’t, only if a unit holder sells units," he said. 

Multi-manager funds also tend to have a more transparent fee structure, with total expense ratios (TER) ranging from between 2 and 2.5 per cent on average, although there are outliers on either side. 

"Discretionary fees tend to be more unbundled," Donaldson said. "There are transaction costs and annual fees. These can be less on a platform, but then you have a platform fee." 

However, he also says discretionary costs tend to fall roughly in line with multi-manager funds. 

For anyone looking to go down the outsourced route, Donaldson says it is important, whether investors use advice or not, to ensure the investment is suitable for their needs. 

"With managed portfolios there are elements of service involved, and that’s less so with multi-managers. Some people like the quarterly reports and holding-by-holding analysis." 

Jason Witcombe, director at Evolve Financial Planning, says both offerings are expensive, which is why he prefers to compile portfolios of passive investments in-house. 

"The increase in costs is significant over the lower-cost alternatives," he explained. "And there’s absolutely no guarantee it’s going to produce better outcomes." 

However, he says that multi-manager products have one distinct advantage over their discretionary peers.

"With discretionary it is quite difficult to get to grips with what the total cost is. I think with multi-manager it’s a little easier," he said.