To date, neither advisers nor their clients have had to worry too much about MPS performance: as long as there was a sufficient weighting to the US – which most such portfolios had – investors were seeing a decent return and everyone was happy. If the AI trade wobbles any further, however, we could see more differentiation among MPS providers and performance may have to become a more important selection factor.
According to Rich Mayor, senior analyst at the lang cat, when it comes to selecting an MPS, performance has so far only been one of a number of considerations. “Data from our Analyser due-diligence tool suggests advisers do weigh up the strategy to match with their investment philosophy,” he adds. “So this is aligning more with Consumer Duty, rather than the traditional metrics of performance and price, though these still do feature of course.”
Nevertheless, recent research has indicated the success of Tatton and Quilter – the two leading providers, each with more than £20bn in MPS assets – has coincided with strong performance from both groups. An analysis by Citywire of some 100 portfolios run by the two groups found Tatton leading the way over one and three years, but Quilter ahead over five and 10 years. This would suggest – at the very least – advisers are performance-sensitive, even if it is not the key factor.
While there are nuances to performance data, those MPS solutions with the most US and technology exposure have generally done best and, by the same token, those with the least have faced an uphill struggle. Over the third quarter, for example, Defaqto analysis of the defensive sector reveals the top performer as Alpha Beta Partners Global Macro, which was holding around 75% in the US, including 15% in a Nasdaq ETF and another 5% in a dedicated semiconductor ETF.
At the other end of the scale over this three-month period was the Parmenion MPS. These MPS are low in US equity, with an equal weighting in UK equity and nothing in areas such as emerging markets or Asia excluding Japan – a structural asset allocation that has proved a headwind for performance. An income mandate has also proved a handicap for MPS providers in the prevailing environment.
Tighter spread
Andy Parsons, head of investment and protection at Defaqto, says: “Looking at returns – whether that be MPS or multi-asset – the spread between the very top performers and the bottom ones over the Q3 period is significantly tighter for what is deemed the lower risk/volatility cohorts, such as the Defaqto MPS Defensive and Cautious groups and the IA Mixed 0-35% and IA Mixed 20-60% groups than those with exposure to riskier assets and higher allocations to equities.” In other words, equity exposure is making the difference on performance – with participation in the dominant AI trade or otherwise a key factor.
It also means that, in selecting an MPS provider, investors have faced minimal trade off-between active and passive. Where companies offer both active and passive portfolios, the two have run largely neck and neck in performance terms for the year to date.
In turn, advisers have been able to go for the lowest-cost, passive solutions with no performance consequences. If anything, in such circumstances, the high weighting to technology has been a boost – and this may not hold if other areas start to perform better than the US. In turn, there may be more differentiated performance from MPS groups – indeed, it is already possible to identify some real divergence in strategies.
Simon Doherty, head of managed portfolio services at Quilter Cheviot, says the group is largely sticking with its US positioning across its MPS, adding: “We remain confident in our positioning across the so-called ‘Magnificent Seven’ stocks, as well as the broader technology and communication services sectors, focusing capital on conviction ideas while tilting away from those where we perceive elevated expectations have become decoupled from reality.”
“These strategic calls are likely to become more important as market leadership broadens out and the exuberance in parts of the market – be it AI-related, say, or in corporate bonds – is challenged.
While some MPS and multi-asset managers believe the all-in yield for corporate debt justifies their continuing to hold the asset class, others are growing nervous about tightening spreads.”
The Quilter Cheviot team has also broadened exposure to the semiconductor sector but has also been selectively increasing allocations to international equity markets while – in the case of MPS Balanced and MPS Income – decreasing exposure to UK equities. “Additionally, we selectively reduced the strategies’ allocation to cash, hedge and absolute return strategies to support what was a marginal increase to overall risk asset exposure,” says Doherty.
For his part, Dan Caps, lead portfolio manager on Evelyn Partners’ Index MPS, has been increasing exposure to Europe excluding UK equities, but primarily at the expense of a hitherto overweight position in UK equities. “As part of these changes, we topped up the market capitalisation-weighted exposure to continental Europe while reducing both our broad-index and mid-cap UK positions,” he explains.
“Our analysis currently favours continental Europe over the UK on relative earnings basis.” Within its US exposure, meanwhile, Evelyn Partners has been more cautious, adding exposure to the L&G S&P 500 Equal Weight fund.
The group has also preserved its defensive exposures, notes Caps, adding: “Global markets continue to offer long-term growth opportunities but, with uncertainty elevated, high-quality bonds and gold provide valuable ‘ballast’, helping to smooth returns, preserve capital and hedge against risks.”
Fixed income faultlines
There are also faultlines appearing in fixed income exposure – notably on the balance of government and corporate debt (which we cover in more detail in this Monday Club focus piece, Dicing with debt). While some MPS and multi-asset managers believe the all-in yield for corporate debt justifies their continuing to hold the asset class, others are growing nervous about tightening spreads. “In fixed interest, we remain diversified across nominal and index-linked government bonds,” says Caps.
“In our Cautious, Balanced and Growth models, we made only a slight increase in nominal UK government bonds – funded by our reduction in equities. We made no changes to our corporate bond exposure, however, and continue to prefer shorter-dated corporate bonds as a way of controlling our exposure to credit risk.”
In contrast, David Coombs, head of multi-asset at Rathbones, is steering clear of corporate debt altogether. “Global spreads on both investment-grade and high-yield are trading lower than since before the global financial crisis,” he points out.
“There is very little margin for error here. Is it because many companies seem to have better balance sheets than governments? Or is it because investors are pushing bond prices ever higher as they try to lock in yields before expected rate cuts? We prefer to hold shares rather than equity-like fixed income – especially those with high cashflow and little debt.”
These strategic calls are likely to become more important as market leadership broadens out and the exuberance in parts of the market – be it AI-related, say, or in corporate bonds – is challenged. MPS providers will need to earn their stripes and the cheapest options could prove vulnerable.
