Taking the different approach with multi-asset

A number of ‘off-the-shelf’ solutions have emerged, each with slightly different characteristics. How do two of the most popular approaches – multi-asset and model portfolio services – stack up against each other?

The majority of the major platforms, rating and research agencies have launched their own model portfolio services. These will generally be a series of risk-rated portfolios for a range of different client types. Advisers can model them to their client’s risk profile and then rebalance them on an advisory or discretionary basis.

For this type of product, it is relatively easy to compare the performance of the model portfolio as a whole to the benchmark. It is also relatively easy to compare the performance of the component funds within the portfolio, certainly within a platform context.

However, it is more difficult to do peer-to-peer comparisons. Many do not share the same benchmarks, or the benchmarks are heavily customised. For example, in the Cofunds level 4 model portfolio, the benchmark comprises cash, gilts, property, corporate bond, and UK, European, US and Japanese equity indices. The FE Model 4 portfolio has cash, fixed income, global developed equity, property and UK equity. Performance comparisons are not always intuitive.

Defaqto has launched a ratings service for model portfolios, giving each a ‘star’ rating. However, while this includes the majority of the discretionary fund managers, it does not include rating agencies such as Morningstar, which are providing model portfolios, or the model portfolios available on the major platforms.

Comparisons are easier for multi-asset funds, which can be benchmarked against an index and the wider IMA sectors. It is possible to see how they have performed against peers that take a similar approach, but there is less transparency on the performance of the component parts. Investors are reliant on the fund manager to admit that a weighting in gold, for example, has weakened returns.

As such, it is also difficult to say whether a model portfolio or multi-asset approach is necessarily ‘better’. In theory, the manager of a multi-asset fund should be able to make and execute decisions more quickly, but this is only useful in the right hands. Equally, the increased flexibility available with multi-asset portfolios to explore a wider range of assets only helps performance if a fund manager is skilled.

Some groups, such as Vanguard, argue strongly that over the long-term regular rebalancing is far more important. This ensures that investors buy when assets are cheap and sell when they are expensive.

John Husselbee, head of the Liontrust Multi-Asset range, points out that many people, himself included, run a model portfolio service alongside their multi-asset fund.

As such, he says, it is tricky to make a direct comparison: “It depends on the type of service that people want,” he says.

There is a potential cost difference between the two approaches, but again, it is difficult to quantify, while there may also be capital gains tax considerations (CGT). All switches within a multi-asset fund are free of CGT.

There is a danger with a managed portfolio service that rebalancing and switches could trigger a capital gain. Again, this may affect the relative performance of the two types of approach for different clients.

Neither a managed portfolio service nor a multi-asset fund is necessarily structured to perform better and there are good and bad examples of each. Data providers recognise the comparison problem and FE is set to launch five new multi-asset sectors based on risk ratings to facilitate better comparison between multi-asset funds.

However, in looking at managed portfolio services versus multi-asset, the outcome for clients can be significantly different depending on the efficiency of execution, the level of fees and the tax position of the client.

Cherry Reynard is a freelance journalist