MM vs DFM: Counting the costs

Fund management groups responded to the expected surge in new popularity for multi-manager offerings by making sure they had their own multi-manager franchise, as shown by JPMorgan Asset Management recently hiring Tony Lanning to head up its new Fusion range.

Discretionary managers, the other expected beneficiary of the anticipated outsourcing surge, also responded. Many that had in the past been solely focused on bespoke portfolios with high minimum investments looked to launch managed or model portfolio services, either for direct investment or on platforms, with lower minimum investments to attract more adviser business.

But it is the established franchises that have seen the bulk of the interest so far, with money pouring into the Jupiter Merlin multi-manager funds and into the larger DFMs, such as Rathbones, Brewin Dolphin and Brooks Macdonald.

Product comparison

Multi-manager funds and DFM model portfolios share a lot of similarities: both invest in a range of funds run by other asset managers across the spectrum of asset classes, while both tend to exist as part of a range - generally risk-rated - of funds that offer access across the risk spectrum for clients.

There are a number of differences that distinguish the two, as well. Where multi-manager funds are traditional unitised open-ended funds, model portfolios are not unitised in the same way. This allows multi-manager funds to be more portable, available directly from fund groups or on platforms and in a variety of different tax wrappers.

On the other hand, DFM portfolios will differ whether they are bought directly or, as is more common, on a platform. On a platform that has DFM portfolios available, such as Novia and Ascentric, the investment universe of the DFM portfolios is determined by the platform and it cannot go off-platform.

Discretionary managers argue that their model portfolios are merely extensions of their bespoke portfolios and are therefore backed up by the entire research teams that also work on the bespoke offerings, which they say gives them an edge over multi-managers.

However, the extent of the crossover between the two sections is often unclear, as is generally the case with discretionary managers, who have yet to fully subscribe to the wave of transparency sweeping through the investment industry.

Clarity on cost

A particular area in which there is less than full transparency is on the subject of fees. As both multi-managers and discretionary model portfolios invest in other funds, there are two layers of fees, those of the fund itself and those of the investee funds it invests in. If you’re investing via a platform, then there is also the platform fee to pay.

DFMs have long claimed that they can negotiate lower fees on the funds, giving them an potential advantage over multi-manager. However, after the RDR that claim is harder to make.

“Up until recently DFMs have been able to benefit from institutional rates on their investments but now they will come under pressure unless they can justify that they provide a service over and above that of multi-managers,” claims Dan Clayden director of Clayden Associates. Mr Clayden adds FMs will likely have to lower fees on their managed portfolios to compete with multi-managers.

The problem, according to David Norman, chief executive of TCF Investments, is that DFMs already appear more expensive than multi-manager funds in spite of the total cost of ownership not always being clear.

“It is complicated because in most multi-manager funds the total cost of ownership is reasonably transparent,” he says.

“I think the first thing they need to do is be transparent and here is a lot of pressure as multi managers already appear cheaper and there are a lot of costs that are not disclosed by DFMs. It is impossible to know if they are adding any value either.”

The bottom line

But it is not as simple as to say multi-managers are cheaper, as not all are. Many discretionary portfolios, such as those from Seven Investment Management or London and Capital, invest in passive vehicles in order to bring down their costs.

Some DFMs are also lowering their costs, such as Whitechurch Securities, which lowered the charge on its passive portfolio from 0.5 per cent to 0.35 per cent to make it more competitive. Gavin Haynes, managing director of Whitechurch, said any portfolio with a charge of more than 1 per cent would struggle to attract business.

As a comparison, the most recent Jupiter Merlin fund brought to market, the Conservative Portfolio, was launched with an annual management charge of 0.5 per cent and has ongoing charges of 1.25 per cent.

Data from Defaqto on the 66 model portfolio service offerings that it covers show that 15 have a annual management fee that is greater than 1 per cent, with another 18 charging a fee between 0.75 per cent and 1 per cent, making them more expensive than multi-manager funds even before other costs not included in that initial fee are factored in.

However, 19 of the portfolios have an annual charge of less than 0.5 per cent, showing there is a much larger disparity when it comes to fees from DFM than from multi-managers.

There already appears to be price competition coming between discretionary and multi-managers as they compete for outsourced adviser business, and this could be set to continue as the industry continues to press for further transparency and better value for money.

As Fraser Donaldson, insight analyst at Defaqto, says: “There will be slow downward pressure on prices due to this competition between DFMs and multi-managers, and there is an element of that happening already. Commercially they all need to be competitive and they will all need to reduce prices.”

Advisers choosing between DFMs and multi-managers would do well to examine the total cost of ownership closely, but should also be aware that those costs may well fall soon. Advisers are in the prime bargaining position, with multi-managers and DFMs competing to attract their business, and they would do well to use that power.