Managed portfolio services (MPS) are having a moment this year as an increasing number of wealth managers and advisers offer the solution to clients. But are they better for your portfolio than a classic fund or an index?
It turns out managed portfolio returns are not quite living up to Morningstar’s category indices, at least not for allocation categories – which is most of the market. According to Morningstar’s UK Managed Portfolio Landscape 2022 report, managed portfolios are seen to provide lower total and risk-adjusted net returns in comparison to indices in equivalent allocation categories. However, these indices are a tough hurdle most funds would struggle to beat.
However, price wise, it’s clear why MPS are a hit with advisers. The overall cost for an allocation MPS is about 20% cheaper than an open-end fund multi-asset equivalent.
Morningstar launched its UK Managed Portfolio Database in July this year. It's the first independently-collected market database of UK managed portfolios.
Alongside it, we released a report detailing the rapid takeoff MPS is enjoying as it becomes one of the fastest-growing investment solutions in the UK.
A new Morningstar report builds on this previous release, with additional focus on fee and costs, performance, and risk; including an overview of the Morningstar Portfolio Risk Score, which can be used as a guide to portfolios’ risk and diversification.
But What is MPS?
Managed portfolio services are investment services through which wealth managers and advisors can provide professional portfolio management to investors, encompassing asset allocation, the selection of underlying funds, and trade execution.
According to Tom Mills, senior analyst at Morningstar, our database holds over 900 managed portfolio datapoints at the time of writing. There are currently 66 UK providers with portfolios in the Morningstar dataset, with a range of risk profiles and objectives. As of September this year, 94% of the managed portfolios in the UK database belonged to allocation categories.
What We Found
As mentioned, the report looks specifically at fees, costs, returns and risk. Starting with fees, allocation categories hover around the 0.24% mark, indicating that providers typically charge a flat fee at every risk level across a given multi-asset range. Passive MPS have a median fee of 0.15%, while active or blended charge a median management fee of 0.24%.
On the cost side, managed portfolios overwhelmingly use collectives to build portfolios, and according to Mills, the added costs – or "look-through" costs – should also be factored in.
Based on median values, this adds 0.61% in annual costs to active managed portfolios, 0.39% to blended, and 0.15% to passive offerings. Look-through costs increase through the risk spectrum, from 0.21% for cautious categories to 0.60% for the most aggressive options.
Beating the Index
Across most allocation categories, in the most recent five-year period, the median managed portfolio has produced lower total and risk-adjusted net return than the equivalent Morningstar category index.
Mills notes that the pattern is similar to open-end allocation fund category averages, which have also mostly lagged Morningstar category indexes over this period. Each category index is an "index of indices" with a fixed level of equity exposure aligned with the model category.
When factoring in total costs and comparing the median UK managed portfolios to open-end funds in equivalent Morningstar allocation categories, however, our research found a cost advantage of 0.24%-0.28% in favour of managed portfolios, depending on the category.
Green is Extra
Both management fees and look-through cost jump for green options too. Portfolios described by their providers as having a sustainable focus cost are all generally more expensive in this respect.
Morningstar Portfolio Risk Scores, which are highly correlated with the level of equity/risky assets in a portfolio, can be used as a guide to a portfolio's risk and diversification and compared with category peers.
We find that, on average, Portfolio Risk Scores rise, as expected, in line with the level of equity/risky assets, and we see fairly close alignment between the managed portfolios and their respective Morningstar Categories.
Commenting, Anastasia Georgiou, Morningstar's director of client solutions, advisor segment, EMEA, says: "there is a need for more comparability across fees and performance, which are key data points used by advisers in selecting managed portfolios. The research [...] ensures advisers can assess where the investment costs are coming from and that their clients are receiving the best returns possible."
