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The pros and cons of model portfolios from the teams behind them

24 November 2017

Standard Life Wealth and Hawksmoor outline the positives and negatives of model portfolios for investors.

By Jonathan Jones,

Reporter, FE Trustnet

Model portfolios are an “interesting beast” but investors being put into models by their advisers need to be aware of the pros and cons of the services and ask whether they are really the right product for them, according to model portfolio managers. 

As part of the inside model portfolios series run by FE Trustnet over the last year, we have looked at a number of products on offer to independent financial advisers (IFAs).

But while we have examined the process, positioning, performance and outlook for all of the individual products, below we ask a simple question: What do you get for your investment?

Starting with the positives, Ben Conway, manager of the Hawksmoor model portfolios said the main attraction of them is their convenience.

“Model portfolios are a very interesting beast and what I am implicitly saying is [they are good] for their convenience and what they offer,” he said.

The key benefit is that the products fit a “regulatory regime”. This means that an adviser can determine how much risk their client is willing to take and then fit them into an appropriate band.

Table of models run by Hawksmoor Fund Managers

 

Source: Hawksmoor Fund Managers

“It fits with the IFA business model because if they have a bunch of clients on a platform it is easy to administer. It is very friendly for the intermediary market,” he said.

For clients, the manager added that it gives them access to the best ideas of a fund house, allowing them to choose their favoured discretionary fund manager (DFM) based on process and philosophy, while also taking into account their risk profile. “This is nice and neat,” Conway said.

Another major positive for advisers, and for clients, is the consistency of client outcome, according to Ronnie Binnie, head of business development at Standard Life Wealth.

“The good thing about running models is that every client gets the same outcome. If you press a button once, then everybody’s portfolio changes at the same time,” he said.

Historically, this would have been done by an adviser individually, meaning that, for example, those that were changed at 4pm on a Friday would have a different portfolio to those that were finalised on a Monday, he explained.

“That is two different outcomes and while it was never their intention to have different portfolios that’s what they’ve got,” he noted.

As well as this, accessibility for people who would not have had the option to buy into these services a decade ago is also a big positive.

“If you go back 10 years ago there weren’t many managed portfolio services out there and we were one of the early adopters back in 2011,” Binnie said.

As such, advisers are not hamstrung into two or three options, but have a range of different houses to choose from giving their clients the best opportunity for success.

And these propositions are also no longer for the high net-worth individual, with many portfolios now available for investors looking to save small amounts of money a month.


“You’ve got access to specialist management and to much more levels of wealth than you have ever had before,” the head of business development said.

“It used to be that these were only available to the £1-2m plus type of portfolios where now you can access discretionary management from anything from a pound upwards.”

However, there are negatives to the models, with the most obvious coming in the form of the platforms, according to Hawksmoor’s Conway.

The manager, who outlined why he likes to back boutiques and new funds, said that these are not available on many of the platforms, meaning investors are missing out on returns.

“We offer our portfolios across several different platforms so that IFAs across the whole of market can access them. If we restricted ourselves to any one platform then obviously we would have restricted our addressable market,” he said.

To run on so many platforms, however, there are two things a manager must do. They must make sure the underlying funds are the same across the board and not invest in funds that are soft closed or deterring flows.

“As soon as a fund gets to capacity it is removed and if it is taken off the platform then you have to remove it from your model portfolios,” he said.

The manager said it is important for advisers to be open to their clients about they forgo, which is the potential for higher returns in smaller, more nimble funds.

“We can’t purchase the smaller boutique funds at launch. In the case of platforms they won’t put those funds on because it involves a lot of administrative work,” he noted.

“The economics of platforms means they will only put funds on where they know they are going to get good inflows into them.”

As such, investors could be missing out on some positive returns, and while he strives to outperform through his approach to risk, he expects his multi-asset, open-ended fund offering to outperform his model portfolio service.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

“I would be extremely disappointed if our [MI Hawksmoor] Vanbrugh fund didn’t outperform our Cautious model because not only are we able to invest in smaller funds but we are able to buy investment trusts, which you shouldn’t own in a model portfolio context because you need to be in control of your dealing,” said Conway.

It is for this reason that, when writing about the Waverton model portfolio offering in September, the team was quick to stress the use of its own open-ended investment companies (Oeics), which were specifically set up to allow it to own whatever it wanted without compromising the platforms it could list on.

Not all groups have done this and the challenge of running a consistent portfolio across all platforms is a struggle, Conway said.

Indeed, other issues with platforms include different rules as to when portfolios can rebalance, according to Standard Life Wealth’s Binnie.


However, he said that platforms have improved over the last decade, with slightly looser restrictions and more choice available, and as such the Standard Life Wealth portfolios are looking to be added to some in the near future.

“For us to be moving forward you want to make sure no matter which platform you run the money on you are going to have consistency,” Binnie explained.

“That is why we are really keen, as we diversify into third-party platforms, to make sure that the people we speak with are not going to compromise our investment story. Otherwise you compromise the whole proposition.”

Another potential pitfall for the end client is cost, which has been under the microscope in recent years with the rise of cheaper passive strategies and the Markets in Financial Instruments Directive (MiFID) II regulations on research costs due to come into effect in January 2018.

“Cost is still prohibitive. You have the cost of the platform, add the cost of the underlying funds in portfolio, the discretionary manager and the price of dealing and the whole thing becomes quite expensive,” said Binnie.

While many portfolios have a charge of under 50 basis points, it is the additional costs that can make the whole proposition expensive.

“Everybody is trying to maintain their part of the margin. Going forward to be successful we will all have to accept some sort of compromise somewhere. For example, our portfolio service has no VAT. Cost is going to become more important,” he added.

The final area that model portfolios could improve upon, Binnie said, is choice. Although more providers can mean greater competition, not all services have shifted with the times.

He said there are now four types of investor but that models continue to only focus on two areas: income and growth.

Growth tends to be for younger people with a longer time horizon, while income has traditionally been for those nearing retirement age.

However, with people living longer, wealth preservation – those looking to hold onto their assets and make a smaller amount of growth – and de-accumulation of capital income – people in retirement looking to reduce their capital over time – also need to be included.

“Up until now most people were younger and accumulating wealth but that is changing,” Binnie said. “If you look at these four client forms, a lot of portfolios being offered right now manage money the same way but try and make it work for all four.”

He argued that some providers have models with similar holdings just weighted differently, rather than individual models for each type of investor – as another pitfall that could be addressed.

As with anything, there is no right or wrong investment vehicle and the choice is down to the individual adviser and client. What may work for some may not work for others.

Nothing in the above article should be seen as investment advice or a recommendation to buy or sell.

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