“Fundamental structural barriers” distort model portfolio investment selection, finds lang cat paper for AIC

The use of investment companies in model portfolios, both directly by advisers and by discretionary fund managers (DFMs), is being restricted by a range of platform-related barriers, according to a new study conducted by the lang cat for the Association of Investment Companies (AIC).

A large majority (86%) of advisers surveyed by the lang cat for this paper agree that recent high-profile fund suspensions highlight the importance of looking at a full range of asset types. Yet open-ended funds make up 91% of the assets held in model portfolios, according to the study, Practically Speaking: Investment companies within centralised investment propositions, leaving other fund structures such as investment companies “a minority sport”.

The majority of advisers surveyed (82%) agreed that “there is an inherent bias towards mutual funds within the retail investment sector”.

That bias is illustrated by the fact that all DFMs surveyed by the lang cat who offer own-custody model portfolios include investment companies within them – suggesting that it is platforms that hinder wider investment company use in models.

Trading costs are one of the principal barriers to the use of investment companies in model portfolios on platforms. Although four advised platforms are “truly asset neutral from a cost perspective”, according to the study, these make up only a sixth of total assets on adviser platforms (a list of adviser platforms, and the extent to which their cost structure acts as a barrier to investment company usage, can be found at the end of this release).

Most advisers who use DFMs expect them to take an unconstrained view in investment selection, with 81% agreeing that “part of the reason I outsource to a DFM is that I expect it to make full use of all asset types available in order to generate returns for my clients”.

However, 16% of DFM-using advisers surveyed were unable to estimate what proportion of a typical client’s portfolio was held in investment companies.

Nick Britton, Head of Intermediary Communications at the Association of Investment Companies (AIC), said: “This lang cat paper paints a worrying picture of the contradictions within the model portfolio world. While advisers who outsource to DFMs largely expect them to take an unconstrained view of the investment universe, the reality is that structural issues such as platform costs form barriers to investment company use.

“One particularly telling finding is that all the DFMs surveyed by the lang cat who offer an own-custody service (that is, not on a platform) include investment companies in their model portfolios. That suggests that given a free rein, DFMs would use investment companies, and it’s structural barriers on platforms that cause the concentration of models into open-ended funds. It seems valid to question whether clients who are outsourced to DFMs are really getting the DFMs’ first pick of investment choices via their on-platform model portfolios.

“However, the report also points to several reasons for optimism. Several DFMs are running model portfolios with investment companies on platforms, showing that it can be done. Established platforms are seeking to improve their offerings and there are new, innovative entrants to the market.”

Steve Nelson, Insight Director at the lang cat, said: “There’s no doubt in my mind that platforms have changed the intermediated retail sector significantly for the better over the past 15 years or so in terms of open architecture products and technology choice. However, with a few notable exceptions, the sector has largely failed to provide unbiased and unlimited investment choice to advised clients. Our paper explores some fundamental structural issues standing in the way of progress and imagines how things might change in order to unlock true, whole of market investment access.”

DFMs who use investment companies have their say

The lang cat’s report highlights that not all DFMs eschew investment companies in their models, even when those models are run on platforms. Wealth managers Binary Capital and Crossing Point are noted for offering model portfolios that use investment companies for substantially all their equity exposure, while Smith & Williamson has used investment companies since the launch of its model portfolio service in 2012.

Mickey Morrissey, Partner and Head of Distribution at Smith & Williamson Investment Management, said: “Investment companies offer us the opportunity to access sectors, such as the property sector, through a closed-ended structure which we believe is the most efficient way of accessing investments which are less liquid in their nature. In addition some investment managers can only be accessed through investment companies. Finally it is worth highlighting the performance advantages that investment companies offer investors. Statistically it is the case that certain closed-ended funds outperform their open-ended sister funds. We are able to benefit from this outperformance by investing in the investment company option rather than the alternative that is on offer, which is often the route that our peer group might take.’’

Saftar Sarwar, Chief Investment Officer at Binary Capital Investment Management, said: “Excluding investment trusts results in DFMs excluding a universe of some really exceptional investment products: well run, well managed in a unique capital structure, with persistent performance and excellent transparency. Many companies are not going public as early as before; there’s a growing trend for them to stay private for longer. Many investment trusts offer exposure to private markets which is not otherwise available, or difficult to obtain elsewhere. Clients lose out on performance. Clients lose out on differentiated strategies, clients lose out on some ‘hidden gems’.”

Tomiko Evans, Chief Investment Officer at Crossing Point Investment Management, said: “The majority of UK wrap platforms have the capability to run a model portfolio service for investment trusts. It is fair to say that the costs of buying and selling vary from platform to platform from no dealing charges to an expensive £15 per trade. We find the average platform charges £1 per trade making purchasing investment trusts on platform simple, easy, and competitive. Most of the platforms have the majority of trusts one would expect and will add additional ones if requested. Platform providers are starting to realise the benefits of investment trusts and are seeing increased demand.”

Are trading costs a barrier to investment company use?

The following table from Practically Speaking: Investment companies within centralised investment propositions indicates to what extent costs form a barrier to investment company use on major advised platforms.



Click here to read the full report




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  1. Practically speaking: Investment companies within centralised investment propositions was completed by the lang cat on behalf of the AIC. In its research for the paper, the lang cat surveyed 192 members of its adviser panel in late summer 2020, and also held conversations with a number of platforms, DFMs and software providers. It builds on the lang cat’s previous research conducted for the AIC including We Have Trust Issues and You Can Do It.
  2. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 358 members and the industry has total assets of approximately £209 billion.
  3. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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