Product review: Morningstar model portfolios

Joining the tranche of providers offering a model portfolio service for advisers is Morningstar Investment Management.

Launched on 14 May, the Morningstar OBSR Managed Portfolios aim to provide a “complete outsourced portfolio construction service” combining asset allocation and fund manager selection.

The service will blend the expertise of Ibbotson Associates for asset allocation and OBSR for fund management research. Funds included in the portfolios will usually hold a Morningstar OBSR analyst rating.

Five risk-and-reward profiles will be available to choose from: cautious, moderately cautious, moderate, moderately adventurous and adventurous.

The annual management charge for assets allocated to one of the active-passive blend portfolios is 0.3 per cent, reducing to 0.2 per cent for assets allocated to purely passive portfolios.

Morningstar said that its portfolios will be reviewed and rebalanced on at least a quarterly basis.

MM view

This seems like a natural step by Morningstar. The firm already operates an adviser workstation and provides extensive data and analysis, giving it a good basis for developing a managed portfolio service.

Morningstar has a strong position in the market and access to the right tools; it has existing links to advisers, can utilise the research it carries out already, and can pull in expertise from its OBSR arm following its acquisition of Old Broad Street Research in 2010.

For advisers that already hold the firm’s ratings and analysis in high esteem, the fact that funds chosen for the managed portfolios will hold an analyst rating will provide some extra reassurance.

But there is significant competition in the market for outsourced portfolios. According to data from Defaqto, at least 65 discretionary fund management (DFM) services are offering model portfolio services at present.

One plus point of this latest offering is its relatively low cost; 0.2 to 0.3 per cent is not an excessive amount, and it is pleasing that it has made the distinction between active and passive offerings rather than just making extra profit on the latter.

The service is initially only available to advisers in the Argentis group via the Skandia platform, although a roll-out to other platforms is planned. Testing the water with one platform before becoming available on others is standard practice, although Morningstar will need to increase its coverage to gain a high volume of inflows.

Morningstar’s focus on platforms is interesting, however, in that it is moving away from the DFM style of offering independently before migrating onto platforms. This makes sense for a firm focused on technology and fits the approach that advisers concerned about client poaching prefer.

The provider has pitched fairly mid-range by offering five portfolios – with names as vague-but-hopefully-descriptive as any in the market – while some competitors offer up to 12.

As would be expected, its asset allocations for each of the portfolio types vary depending on the risk profile. At the cautious end, 21 per cent is allocated to equities, 66 per cent to fixed income and 10 per cent to cash. For the adventurous, however, 91 per cent is in equities, with 5 per cent in property and 4 per cent fixed income.