Futureproofing Your MPS  

How to get the best of both active and passive with an MPS

This article is part of
Guide to choosing an MPS provider

How to get the best of both active and passive with an MPS
(Andres Ayrton/Pexels)

The issue of active versus passive investing is a familiar consideration, and one that model portfolio services are not immune to.

“The active and passive debate rumbles on, and nowhere is it more prevalent right now than in the MPS space,” says Tony Lawrence, senior investment manager at 7IM. “This is because there are far fewer obstacles to deliver both options to market.

“It’s not the same as launching a fund whereby you need to procure seed investment and appoint a thousand counterparties. You can launch both tomorrow if you feel so inclined; and MPS providers do. You’ll frequently see established and newcomers alike offering active, passive and a bit of both.”

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The case for active

Lawrence adds that those who support an active approach will point to periods such as 2020. “They were able to navigate the choppier environment with better results, and it’s not lost on them that we’re likely headed for a trickier time over the next few years.”

John Bellamy, managing director and head of adviser solutions at Waverton, also says that an active portfolio ought to be better positioned to “duck and weave” in changing conditions relative to a passive vehicle.

He cites growing concerns that the next decade may prove harder to navigate for investors than the last, with higher, more volatile inflation, rising interest rates and the threat of recessions.

Additionally when it comes to sustainable investing, an active approach is more likely to align, according to Anastasia Georgiou, director of client solutions at Morningstar.

“You’re selecting investments for a specific reason and around a specific objective, so [it’s] more likely to be an active approach if it’s a sustainable managed portfolio.”

An active approach also enables investors to pursue alpha returns, Georgiou adds. “You’re looking at the potential of a ‘star manager’, or a bigger firm with a well-established, long-term record that potentially could bring that additional alpha to the investment.”

The case for passive

While most active funds have a strong style bias that produces alpha over the long-term, Antony Webb, deputy head of managed portfolio services for Quilter, adds they may produce poor relative returns over the short-term, and that many clients do not have the risk appetite.

Chris Metcalfe, chief investment officer at Kingswood, says the group starts with a balance of probability test. “[This] is effectively, ‘Do we think a given active fund can outperform a passive alternative, net of fees, given the market conditions?’. So, the use of passive funds tends to ebb and flow over time, given the market conditions.”

When it comes to those who favour a passive approach, Lawrence at 7IM says: “[They] will either point to the fact that for some time now they’ve had the upper hand on their active cousins in terms of performance, or they will simply state the undeniable fact that it’s a much cheaper option.”