The latest Morningstar report is a difficult read for multi-asset funds in the UK. It shows parts of the sector have been in outflow for three years, and performance relative to benchmarks has been weak. This has led to pressure on fees.
In the meantime, MPS continues to eat their lunch. However, with the Financial Conduct Authority (FCA) launching a multi-firm review of MPS services and the market environment changing, could this be about to change?
The Morningstar survey – Multi-Asset Fund Trends in UK and Europe – found that among multi-asset funds only the more adventurous 60- 80% equity and 80%+ equity categories have received net inflows in the past three years. The biggest loser by far was the GBP flexible-allocation category. The number of multi-asset fund launches in the UK and Europe has fallen to multi-year lows.
The survey also showed that more costly offerings, such as active funds of funds, have lost popularity, while lower-cost index-based allocation portfolios have attracted significant assets.
It said: “Vanguard has had a large impact with its LifeStrategy range, which has amassed £46bn in assets under management since its launch in 2011. Competing index-based allocation strategies have also reached a significant scale. UK ranges offered by abrdn, BlackRock, HSBC, and LGIM in combination represent over £50bn in assets under management.”
This chimes with the latest Defaqto data, which shows HSBC and Vanguard holding four out of the top five most-recommended multi-asset funds.
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This has put pressure on fees. The survey found that while multi-asset fund fees are steadily decreasing in both the UK and Europe, they’ve fallen further and faster in the UK market, largely as a result of the influence of these lower-cost allocation funds.
Morningstar suggested a number of culprits for the weakness of traditional multi-asset offerings. The first was the growth of cheap, flexible managed portfolio services. This has happened in spite of the range of lower-cost allocation funds available to UK multi-asset investors.
Performance has also been an issue: “The outperformance of the US, and its large caps in particular… Over the past decade multi-asset funds in GBP, EUR, and USD allocation categories have struggled to outperform Morningstar benchmarks due to fees, asset allocation, security selection and market timing attempts,” it said.
However, there is some scope for optimism about the future of the sector. Tom Mills, principal of multi-asset strategies, Morningstar, said: “The remarkable outperformance of US equities likely compounded the challenge of beating market indexes over the past decade.”
This implies any reversal in this trend could draw investors back to conventional multi-asset funds. There are already signs that market leadership is starting to broaden, with significant weakness in the magnificent seven since the start of this year.The appeal of MPS
MPS and Consumer Duty
Equally, it is plausible that the appeal of MPS could start to wobble. This week, the FCA announced it will undertake a multi-firm review of MPS, looking at how firms are applying Consumer Duty.
FCA director, wholesale buy-side Camille Blackburn wrote to CEOs of asset management and alternatives firms, saying: “MPS have been growing at pace. Though MPS sit outside traditional fund wrappers, these portfolios generally invest in investment funds and asset managers are active in constructing and distributing these services. This year, we will start a multi-firm review of MPS looking at how firms are applying the Duty, to provide confidence that investors are receiving good outcomes from MPS and share good practice on how firms are doing this.”
This sounds friendly enough, but there have been well-documented problems with implementing MPS on platforms that this review may expose. There are concerns on rebalancing, on technical glitches that have left clients out of the market, and on consistency of outcomes. There are also concerns that the problems of implementation of MPS on platforms is leading to commoditisation as providers gravitate to certain funds.
Then there are tax considerations. With the hike in capital gains tax (CGT) on shares, this may become a more important issue for advisers.
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Simon Evan-Cook, manager of the multi-asset MGTS Downing Fox Funds, said: “There’s been a lot of CGT changes of late, and from what I understand, there may be more to come. When I set up the Downing Fox portfolios, I set them up to be unitised funds. One of the key reasons was tax simplicity.
“With an MPS, the fact that there is a lot of movement between the holdings may even have been beneficial because you’re eating up little bits of gains, but if you have clients using GIAs, the fact that those tax allowances have come down now, and you have someone making investment decisions on your behalf, there is a growing risk that they will make some change to that portfolio that will trigger a gain for a client.”
Market transparency
There is also growing transparency in the market. ARC has recently launched a range of MPS indices with the aim of building a “universal-standard comparator index series for MPS solutions”.
Defaqto and the Lang Cat have performance tools. These are still relatively young but may show whether the flexibility of multi-asset options can translate into higher returns.
It is plausible that this may start to tip the balance back to more conventional multi-asset offerings, particularly as the sector is now more cost-conscious. Fees have historically been a barrier to investment in multi-asset funds, but as they come down, it removes a source of friction for investors. It has been a tough few years for conventional multi-asset funds, but they may be about to come into their own again.
