Multi-Asset Funds or MPS: the pros and cons

Multi-asset Managed Portfolio Service (MPS) is rising in popularity, but with CGT changes Multi-Asset Funds (MAF) are getting a fresh look. What are the pros and cons

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Multi-Asset Funds or MPS: the pros and cons

Henry Cobbe, Head of Research, Elston Consulting

• Multi-Asset Funds (MAFs) are the traditional approach to investing across multiple asset classes
• Managed Portfolio Service (MPS) offers flexibility and transparency
• Each has its pros and cons, depending on a client’s position and requirements
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Financial advisers seeking multi-asset investment solutions have two main options to consider: a Multi-Asset Fund (MAF) or a Managed Portfolio Service (MPS). Both of these will allow for asset allocation and fund selection to be taken care of by a third-party provider, but their structures are distinct – the former is a unitised product and the latter is a service. Each carries its own advantages and shortcomings, and their use should be carefully evaluated by an adviser when planning.

Multi-Asset Funds – how they work, and what to look out for

​A multi-asset fund is just that – a fund, a product, regulated by the FCA as a Collective Investment Scheme – and normally made up of a diversified selection of about 20 funds, albeit that it can also hold direct securities. Because of its structure, the product held on platform is always the same for whoever is accessing it, although different share classes may be offered, and when changes to the fund are made, they are simultaneous for all clients. Trades can be executed instantly, allowing the manager to act quickly on market events. One of the advantages of a MAF over MPS is that MAFs can hold both the retail share-class and institutional share-class of funds, the latter being much cheaper.

For managers with a large volume of assets to invest, preferential commercial terms can be negotiated for the funds held in a MAF because advisers’ assets are identifiable within their nominee accounts. Transaction costs are also typically lower than for MPS. Costs are bundled within the fund (fund manager’s fee, ongoing charges figure (OCF), transaction costs) and require some careful unpicking in order to conduct a like-for-like comparison with MPS.

One of the frustrations of owning a single multi-asset fund as your portfolio is that you are reliant on the transparency afforded by the manager in order to be able to see how the portfolio is invested. Look-through can be limited. Tax-wise, capital gains roll up within the fund, which is an advantage. Hence the rebalancing of funds within a MAF is CGT exempt.
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However any eventual sale of units will trigger CGT for a general investment account (GIA).

Managed Portfolio Service – the flexible newcomer

A Managed Portfolio Service offers a range of investment portfolios, constructed and labelled as models in accordance with risk, sustainability, time-horizon as specified by the manager. The client owns the underlying funds meaning that unlike with MAFs, they are able to get a clear view of each underlying component of their investment. MPS is a regulated service, meaning that similar to a MAF, it should have standardised, generic objectives.

Offered on platform, MPS costs less than a bespoke direct discretionary service and is an improvement on the slightly clunkier advisory portfolios. Because there is no overall fund structure, there are no minimum seed capital requirements (which is high for MAFs) making them easier to launch than a multi-asset fund.
Product governance regulations (PROD) have placed an increased compliance burden on advisers running their own portfolios. The sheer level of choice and flexibility afforded by MPS gives advisers a useful tool and a significant advantage in demonstrating the fulfilment of their duty of care. 

However, unlike a MAF, because there is no formal fund structure, rebalancing triggers capital gains obligations for non tax-wrapped investments. MPS is also operationally more complex when it comes to transactions due to funds being held individually on different platforms.
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Finally, from a compliance perspective, there are very clear standardised disclosure rules around what must and must not be disclosed by a fund for retail investors.  But there are no standardised disclosure rules applying to MPS service. This means MPS providers can choose how to present their data making it potentially harder to compare providers.

Conclusion

Both MAF and MPS are the investment engine of a financial plan as they allow advisers to map investment options in accordance with client needs based on the level of risk they are willing and able to take. For lower value, transactional clients and those investing from general accounts (GIAs) a multi-asset fund may make more sense, given operational and CGT-related efficiency. But for an adviser’s core clients, and those investing via ISAs or SIPPs and therefore unaffected by CGT issues, MPS offers a higher degree of tailoring, flexibility and transparency and can come at a comparable cost.

The MAF vs MPS debate has a while to run.