Managed portfolios and models have experienced a global rise in popularity. These investment vehicles offer a convenient and cost-effective way to deliver professional investment management and diversification. Managed Portfolios have become the fastest-growing UK investment solution, with on-platform Managed Portfolios estimated to have grown assets by almost a quarter over 2021.
In recent years Morningstar launched model portfolio databases in both the US and Australia, and we were keen to explore the UK opportunity. At the start of 2020, Morningstar started to assess the idea of creating a Managed Portfolio Database in the UK Market. We undertook research in the UK Adviser Market through a third-party provider, Next Wealth to understand more about how advisers were working and where their pain points were. We also had a number of conversations with Managed Portfolio Service (MPS) providers to understand their perspective. The outcome of this research was clear, advisers faced challenges in comparing these services on a like for like basis and providers were equally challenged in being able to compare themselves with the market due to the different approach firms took in calculating and communicating their services.
| Morningstar felt that it was an important task to create a level playing field to allow the same level of comparisons and analysis for Managed Portfolios that was readily available for Funds, Investment Trusts, and ETFs. |
To achieve this, we insist on providers delivering their full holdings history since inception and developed a holdings-based return calculation to run performance both net and gross of fees. In addition, the portfolios are categorised by Morningstar for easy comparison both across the MPS ranges and multi-Asset funds.
The Morningstar Managed Portfolio database successfully launched in July 2022. The database now has over 65 providers and over 1,150 individual portfolios listed. Along the way and post launch there have been many learnings.
1. Transparency
We found the majority of the MPS providers welcomed transparency and were happy to provide their data and holdings to the market. The lack of transparency was primarily related to no consistent performance calculation method being available to all and how adviser software systems were delivering the data to market, which required a licensing fee by the provider to be included within a software system.
2. What's under the bonnet?
At time of launch, with just under 900 portfolios available, in analysis of the holdings across the entire Managed Portfolio Database, we found just over 1,200 distinct underlying holdings are used across all portfolios. Looking more deeply into why the universe of funds might seem narrow relative to the potential universe of funds across the market and the need for platform availability has a part to play. Layering on top of fund availability, quality of investments was a key find with most funds held within the portfolios well-rated by Morningstar and cost was also a crucial factor with 8 out of 10 of the most widely used funds being passive. With a relatively small number of funds covering the entire Managed Portfolio universe, with up to 70% of new advised flows going into these services, asset managers looking for advised assets are in competition for shelf-space.
3. Price
Often thought to be more expensive than their multi-asset fund cousins, Managed Portfolios are cheaper, this has been helped by the removal of VAT for many MPS solutions. In comparing the overall costs of managed portfolios against those of open-end funds (taking into consideration the OCF and DFM fee for MPS and using the Clean Share class for funds) we found an overall cost advantage in favour of managed portfolios of around 24-28 basis points depending on the Morningstar Category. However, it's important to point out that managed portfolios held outside of a tax efficient wrapper such as a pension or ISA is subject to Capital Gains Tax.
4. Sustainable Investing
26% of the UK Managed Portfolio database has a sustainable focus. Of these portfolios the majority score well on Morningstar's Sustainable Globe Ratings scale, with 3 out of a possible 5 Globe Rating being the lowest score. In addition, digging deeper to look at underlying holdings.
Sustainable active funds also feature prominently in these ranges suggesting that many providers are turning to a handful of well-recognised managers when looking for active funds that meet sustainability requirements.
It's difficult to predict the future of managed portfolios in the UK space as it can be influenced by a variety of factors such as market trends, government regulations, and economic conditions.
However, there are a few potential developments that could impact managed portfolios in the UK:
- We expect an increased demand for sustainable investing, especially related to Climate and Impact.
- The use of technology to manage personalisation of portfolios in the Managed Portfolio space.
- Increased focus on ETFs, already growing in popularity; we expect these to feature more heavily in Managed Portfolios in the future.
Overall, the future of managed portfolios in the UK will depend on a range of factors, including evolving investor preferences, regulatory changes, and technological advancements.
Given the growth UK Managed Portfolio products and limited options for advisers to achieve whole of market comparisons, this database provides transparency, comparability, and a greater level of insight for financial advisers, who will have free access to view the data via the Adviser tab at www.morningstar.co.uk
Anastasia Georgiou, Director of Adviser Client Solutions, Morningstar
