Growing demand for customised investment products is set to transform the highly commoditised managed portfolio service (MPS) market, according to industry experts.
Once the bastion of traditional discretionary managers, the model portfolio market has become inundated with providers, including new players like fund managers and platforms, all vying for advisers’ business.
The influx of new entrants has fuelled an all-out price war, with firms leveraging their size and scale to offer portfolios at just a couple of basis points.
Legal & General Investment Management, one of the latest asset managers to throw its hat into the MPS ring, launched a suite of 25 portfolios with annual management charges (AMC) set at 6bps.
“Advised MPS services are a market that is increasingly commoditised,” says Lang Cat consulting director Mike Barrett. “It is much harder than it should be for advisers to make a time efficient open-minded, balanced comparison of all the services on offer.”
Customisation will become an industry ‘buzzword’
LGIM head of retail multi asset funds Justin Onuekwusi (pictured) thinks over time the model portfolio space will mirror the broader fund market in that it will be dominated by five or six strategies, typically those offering superior performance or cost.
But what will really shape the market is a shift in investor demand toward customisation which he thinks is set to become an industry “buzzword” in the next few years.
“What I’ve been really surprised about is the demand for the bespoke element,” he says. “Right now, we’ve got a huge queue of clients asking us to bespoke the 25 [model portfolios] into something that suits their business needs. I think it’s going to be a huge growth area going forward.”
Demand for ESG will drive bespoke model portfolios
Onuekwusi notes the trend toward customisation is already playing out in equity portfolios with the rise of direct indexing products, which allow investors to pick and mix their stock holdings.
Vanguard, Blackrock, Morgan Stanley and JP Morgan have been investing heavily in direct indexing funds, which are forecast to account for $1.5trn of global assets by the middle of this decade and put pressure on off-the-shelf index and mutual funds.
The rise of ESG investing will also drive demand for more customisable model portfolios, Onuekwusi adds.
“They [clients] might want something which delivers a decent level of natural income but also to their preferred risk profile with an ESG tilt. You simply can’t get that in the fund space.”
See also: LGIM eyes disruption as it launches MPS range at 6bps
Already much easier to create personalised portfolios
Gbi2 managing director Graham Bentley expects to see MPS providers focus on bespoke portfolios for larger pots and up their use of multi-asset funds.
“The muddy-middle of MPS for relatively small portfolios has less impetus to grow, without cuts in costs, particularly for active-biased portfolios, without exceptional levels of client engagement and support,” Bentley says.
Nowadays CWC Research managing director Clive Waller thinks many advisers would regard MPS fees as “unjustified for what is a bit of IP”.
Alternatives are out there. Betafolio is one provider that charges a flat fee for discretionary model portfolio management, Waller notes, while other firms charge intermediaries a one-off licence fee to use their models annually.
However, it has become much easier to create personalised portfolios using separately managed accounts (SMAs). “Praemium can do this among others,” Waller says.
“For me, scale and price is everything. An MPS is a basic commodity. Improved technology and demand for portfolios that have themes such as sustainability will encourage personal SMAs where size justifies,” he adds.
Cost still top consideration for advisers
Barrett believes tech will need to play a big part if bespoke model portfolios are to take off. Advisers need a way to model and articulate these types of solutions with their clients “especially at the scale and low-price points we are currently seeing,” he says.
Research from the Lang Cat shows cost is both the top consideration for and against using an MPS.
“If advisers use an MPS service, price is an important criterion for selection, but if they don’t it tends to be because they believe they are expensive and adding little to no value versus their own in-house options.”
See also: Advisers urged to look beyond headline cost as MPS price war intensifies
What next for 60/40 model portfolios?
What would shifting investor preferences for more customisable model portfolios mean for off-the-shelf MPS products?
Bentley says the positive argument for the growth of the MPS market relies on a continuing bull market and the efficacy of the traditional 60/40 equity bond portfolio, which could easily be derailed if higher inflation persists.
“Higher interest rates will increase the attractiveness of cash, perhaps to the extent that cash replaces bonds, and those balances are cheaply held on deposit, ie outside expensive portfolios. Consequently, holdings may be more equity biased – MPS would morph into straight equity portfolios with cash held externally.”
Moving forward he thinks brand trust and client engagement and support will determine which wealth managers and fund groups attract more flows into their MPS.
This includes firms investing in user generated content, such as chat areas on websites where customers can share positive and negative feedback, and social media engagement.
“The revolution comes when we stop using content that is just designed to satisfy a compliance department, and engage properly with customers,” he says.
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