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Performance peaks

Morningstar research indicates asset allocation, rather than fund selection has been the main determinant of returns in the model portfolio space over the past five years. 

Anastasia Georgiou, director of client solutions at Morningstar, said: "Looking at the top 10 performing managed portfolios in each allocation category over the past five years, we find that active, blended, and passive investment styles are all well represented. This suggests that successful asset allocation is the more important factor.

"We find that on average there is a lower dispersion of returns among the managed portfolios than among open-end funds in the same category. Lower dispersion in the overall costs of managed portfolios, compared with funds, could play a part in this."

The research found median management fee on a DFM portfolio described as active or blended is 0.24 per cent, with little variation across the different risk profiles, and 0.15 per cent across passive portfolios. 

The research found that as of September 2022, 94 per cent of the ranges on the market use risk profiles. 

Morningstar anticipates active portfolios have added costs of 0.61 per cent, with blended strategies having 0.39 per cent, and 0.15 per cent in passive.

Portfolios which are badged sustainable have both higher management fees and higher look-through costs than non sustainable equivalents, according to Morningstar.

Model portfolios tend to be between 24 and 28 basis points cheaper than comparable open-ended fund of funds strategies. 

When it comes to returns, Morningstar states: "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."

As is the case across all asset classes, most of the past five years have been extremely positive for index based mandates.

But that period also coincided with the proliferation of model portfolio services and the next five years may well be more volatile than those which have gone before.

And when it comes to cost, model portfolio providers should be in no doubt they are in competition with ranges such as Vanguard's Lifestrategy.

This will likely prove to be a major test of the viability of many model portfolio services.

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