How to select the right MPS

Rather than simply allowing the provider to explain what asset allocation happens to be at any point in time, it can be more helpful to understand how it has arrived at the asset mix. The best providers will have a documented, well-researched, tested and robust methodology to asset allocation, most likely using in-house quantitative tools and modelling, alongside the judgement of experienced investment personnel.

High-quality MPS providers should be doing much more than the bare minimum in relation to fund research.

These providers will be able to justify their asset class holdings while also adding value by, for example, sharing forward-looking stochastic return and risk forecasts on portfolios.

'Buying-in' asset allocation from third-party vendors can for example, point to a lack of risk and asset class modelling capability. It can also lead to an inconsistency between the off-the-shelf asset allocation purchased elsewhere, and the funds used to implement this strategy, with inappropriate fund mapping to this asset mix.  

Is the MPS provider independent of the funds it selects within its portfolios?

Most MPS providers do not have any commercial incentive to select in-house funds to feature within their model portfolios.

However, a number of fund houses offer MPS and, while there is not necessarily anything wrong with these providers openly selecting in-house funds, it is worthwhile understanding how fund selection takes place, and whether each option is properly compared to the wider market ahead of portfolio inclusion.

MPS providers will need to consider a value for money assessment of all funds used within portfolios, as well as the portfolio itself. 

How in-depth is the MPS provider's in-house fund research?

It is relatively cheap and easy to undertake basic fund research, perhaps by sourcing one or two-page fund factsheets, or relying on ‘quality stamps’ from research database providers. These are often backward looking in nature, which can mean they fail to provide important context around prior performance, or a full understanding of the underlying investment strategy.

Performance is cyclical so relying on basic quantitative past performance screening can lead to the selection of investments that have done well in the past but are poorly positioned for the future.   

High-quality MPS providers should be doing much more than the bare minimum in relation to fund research. Advisers looking for evidence that this is the case should ask MPS providers to give examples of in-house fund research notes, as well as documented fund manager research meetings. 

Advisers need to be satisfied that the MPS provider has the operational resources, systems and processes in place.

Can the MPS demonstrate its ability to measure value for money and manage investment costs effectively?