Investors’ enthusiasm for model portfolio services (MPS) shows no signs of abating, with late-2024 NextWealth data showing assets in discretionary offerings standing at £123bn – representing year-on-year growth of 28%. One persistent stumbling block has been measuring such portfolios’ performance, with advisers needing to do much of the leg work themselves – but could this now be changing as a raft of new comparison tools emerge?
Cost pressures, centralised decision-making and a desire for consistency have combined to fuel the rapid rise of the MPS. Furthermore, NextWealth’s research shows that advisers plan to increase their use of MPS significantly over the next three years – alongside multi-asset funds – while continuing to scale back their use of adviser-built models.
Performance measurement has been slow to evolve with the growth in the market and it has put MPS at a disadvantage to unitised solutions. As Ben Hammond, managing director of consulting and insight at the Lang Cat points out, until recently an advisor would have to go to an individual asset manager and ask for the data. “They would be going direct and then trying to do the comparison themselves,” he adds. While this has made it tougher for advisers to evidence their Consumer Duty responsibilities with regard to offering client value, it has also left providers struggling to differentiate their offerings.
“Regardless of what it may say on the label, the contents of the ‘tin’ are paramount
More robust performance comparison options are evolving, however. In the UK, Morningstar were the first to market in 2022, with the Lang Cat launching its MPS comparison software Analyser shortly afterwards. 2024 brought two new contenders, with Defaqto launching its Comparator tool in May, and Mabel Insights also offering a comparison tool. This is a welcome development for advisers, who can now access reporting data.
‘Raft of validation checks’
For its part, the Defaqto service covers 120 DFMs, across 2,800 portfolios, and includes performance, fees and asset allocation. “We receive performance data from the MPS provider on a monthly basis,” says Andy Parsons, insight manager for funds and DFM at Defaqto.
“Whereas some outlets may take ‘screen-scrapes’ of factsheets the DFM provides, we work on a calculation-spreadsheet, ‘first investor from launch’ principle. The asset manager supplies us with the calculated return of a £1,000 investment. Once we receive it, we run it through a raft of validation checks and pick up on any anomalies. We then check with the provider. That will lead to as close a figure as possible to what they publish on their factsheets.”
The Lang Cat uses a similar blend of quantitative and qualitative analysis, with Hammond noting: “It is about getting statistics data on a like-for-like basis. We have 55 MPS providers on our tool now and we spend a lot of time making sure the data we receive is accurate – quizzing them on it and making sure we compare it on a level playing field.”
Looking beyond performance
It is worth noting that most of these comparison tools can actually do more than simply compare performance – often helping advisers judge suitability and risk parameters. Defaqto, for example, groups individual MPS services on their asset allocation and historic performance, rather than a provider’s own designation.
As Parsons points out, these comparators have become important to advisers, who now reference them similarly to how they used to the IA sectors when they were selecting their own funds. Defaqto also publishes league tables over one, three and five years with comparators for each of five areas: adventurous, balanced, cautious, defensive and growth.
“We have looked at all those portfolios that have five-year track records and appraised them on their realised volatility and asset allocation,” explains Parsons. “The MPS provider may have given the solution a ‘balanced’ prefix but that doesn’t mean it is automatically going to be in our balanced sector.” In other words, regardless of what it may say on the label, the contents of the ‘tin’ are paramount.
Limitations and anomalies
These new initiatives are clearly a welcome development in a market that has been tough to navigate yet some limitations persist – not least around the well-documented implementation problems for MPS on platforms. “For some advisers, where a portfolio appears on platform A compared with platform B, platform B may not have the same sub-share class available,” says Parsons. “That does create a minor anomaly.”
As a result, the MPS provider-reported data – the starting point for comparator tools – may not match what the client has actually received. “If you have a certain fund – and it is more likely to be a newer fund – that is hosted on one platform and not another, the MPS provider may say, We will buy it on the platforms we can hold it on, and elsewhere, we will buy a proxy,” explains Simon Evan-Cook, manager of the Downing Fox multi-asset funds. It may therefore be that, on some platforms, a client will end up with a Japanese tracker, for example, instead of a top-performing new Japan active fund.
For his part, the Land Cat’s Hammond argues such a risk should not be overstated. “Not every platform has every asset the MPS provider would like,” he says. “Still, if the provider keeps it ‘vanilla’ – focusing on common share classes, the main providers, the main fund types, the main asset types – that is usually fine.”
Another area where advisers should still exercise caution relates to timing. Again, limitations on platform implementation mean there can be delays in putting portfolio changes into effect, which could be a problem at times of extreme market volatility. “One client may be invested on the Monday, and then the market shoots up overnight on Tuesday because, say, Trump was elected,” Hammond says. “They will then be at a different price point.” This can also mean the ultimate client experience may differ from the performance given on the factsheet.
It is difficult to see how these issues can be wholly resolved until the complexities around the implementation of MPS on platforms are addressed – a far bigger issue (and one for a different article). Ultimately, though, given advisers have largely had to fend for themselves when it comes to MPS performance comparisons, any move to bring transparency to the area is a welcome development.
