Model portfolio services (MPS) have played an increasingly important role in the investment market during the past decade as firms seek new ways of offering consumers more transparent strategies. Yet while the vehicles gain popularity, some of the mechanics can clash with the more traditional parts of the asset management sector, creating friction when investors want to add exchange-traded funds (ETFs) and investment trusts (ITs) to their portfolio.
An MPS serves as a kind of ‘portfolio blueprint’ for investors wishing to opt in, but each client keeps their own pot of wealth invested rather than pooling it all into an individual fund. This means the end client can see exactly where their money is held at any one point. In contrast, a multi-asset or fund-of-fund would not allow for the same level of transparency.
However, the individual nature of the MPS comes with its own complexities. Each time a rebalancing occurs in the portfolio, the trades take place for each investor. This can cause complications in terms of capital gains tax. It also creates difficulties for investments in vehicles such as ITs and ETFs, which serve as individual trades as they are publically listed entities in their own right, rather than collectives with unlimited units available to investors.
Open-ended funds can be traded in partial shares, meaning if an investor cannot afford an entire share, they can purchase a percentage up to the fourth decimal point. But in the UK, ETFs and ITs must be purchased as a whole unit. When it comes to including the growing field of ETFs into an MPS, the investment must be large enough to cover the cost of the ETF, even if it makes up just a few percentage points of a portfolio.
Prices of ETFs span a wide range, with some reaching £900 a share. Many sit under £100. But if an MPS were to hold 1% of its portfolio in an ETF priced at £50, clients would have to hold at least £5,000 in the portfolio to be able to invest.
John Husselbee, head of multi-asset at Liontrust Asset Management, says the challenge comes from the nature of company law, which is applicable to ETFs and ITs because they are listed entities.
“We do not invest in investment trusts or ETFs because we’ve never found a comfortable way of handling this,” Husselbee explains.
“If my £100 client came along and I am selecting an investment trust, to get the exact weighting I need, 4% or something like that, I might have to buy 7.235 shares. If I go to the market and say to my trader, I’ll buy 7.235 shares, he’ll say, ‘No, you can’t. You can buy seven or eight shares, but you can’t buy any fractions of shares’.”
Read the rest of this article in the November issue of Portfolio Adviser magazine
