By Benjamin Reed-Hurwitz, EMEA research lead at ISS Market Intelligence
The UK’s financial adviser channel has undergone significant changes in the past decade, with one of the most significant changes being the face of a client’s portfolio manager.
Whereas portfolio construction and design historically resided with advisers in this channel, increasingly, this is no longer the case.
Around 60% of portfolio decisions—as measured by investment gross sales—are now beyond the remit of the client-facing financial adviser. Decision making is not evenly divided, with 40% of decisions are made by portfolio managers (PMs) running model portfolios (MPS), 14% are made by PMs running unitised funds-of-funds (FoFs), while 6% are made by PMs of unitised asset allocation solutions that invest in direct securities.
Financial advisers building client portfolios, or acting as de facto PMs, using a mix of single strategy funds meanwhile, still accounted for 40% investment fund gross sales in the channel.
This dramatic change in the face of the portfolio constructor has sent ripples across the UK’s fund management universe, offering new opportunities and challenges for fund managers in terms of the distribution of model portfolios and FoF products.
One thing is clear, however – the preferences, whether due to investment philosophy or practicality of implementation of advisers, MPS PMs, and FoF PMs, are anything but similar.
One of the starkest differences lies in the available and considered fund universe. Whereas FoF PMs place over 50% of their assets in non-UK-domiciled funds, this drops to 20% for advisers (acting as PMs).
Advisers and MPS PMs, however, are restricted to what is on platforms—a potentially significant limiter if a client base is broadly distributed amongst the UK’s over 20 retail platforms.
In fact, MPS programs have resorted to creating their own FoF building blocks to limit this (among other) challenges of operating in a platform-based environment. Exchange-traded funds (ETFs) are also notable and are used far more by FoFs than by the other two portfolio constructor groups.
The use of active versus passive solutions is another hot-button topic that separates the three portfolio constructors. Whereas advisers remain distinctly in favour of active management when selecting single-strategy funds to the tune of 70%, the MPS marketplace is rapidly shifting toward more passive usage.
This will be a consequence both of increasing usage of passives in blended solutions, as cost competition has ramped up, and greater sales into passive models themselves.
The investment sales split for MPS programs has now shaded from 55% to 45% in favour of active, which represents a close to 15% decline in share since the beginning of 2022.
FoFs, meanwhile, show a greater propensity to use passive solutions than MPS. A close examination, however, leads us to consider the influence of the economics of internal and external pricing.
Programs that predominantlyuse their own funds are far more passive in nature and are a category dominated by fund managers with significant passive businesses. In fact, such programs leveraging third-party managers have a passive usage much closer to their MPS peers.
Being able to manage money internally offers additional opportunities to balance the cost to the client of the solution with the manager’s desired margin, as pricing can be managed at the underlying fund and portfolio level.
With cost being a significant driver in winning the passive battle, pricing flexibility is power.
Portfolio design is an ‘each to their own’ exercise. Different fund selectors are showing unique preferences in terms of how much control they leave with the client facing portfolio manager.
In general, advisers show a greater propensity to choose solutions where managers can make security and sub-asset class allocations allow.
This is all to say that now more than ever, knowing the portfolio constructor behind clients’ portfolios is essential to winning in the UK fund market.
In addition to each constructor showing distinct asset allocation preferences, they may also exhibit disparate engagement and support preferences.
Certainly, distribution in the UK is in flux, and the changing face of the portfolio constructor is a big reason why.
