Morningstar’s third annual study of the UK on-platform managed portfolio market shows that clients are served by a wide choice of offerings, although the pace of new portfolio launches has recently been slowing after a phase or rapid growth between 2018 and 2022. This could mean a maturing in a sector that is now well populated by a multitude of similar offerings.
We see a continuing downward trend in the total costs of these offerings, which providers are achieving chiefly through greater use of passive funds in portfolios.
In 2022 Morningstar launched its UK Managed Portfolio Database, the first independently-collected market database of UK managed portfolios. Now containing over 1,200 managed portfolios, it provides insights on performance and costs, and allows us to look under the hood at the complete underlying holdings of each portfolio. This reveals some interesting trends in how providers are building their offerings.
Use of Passive Holdings Continues to Rise
UK managed portfolios are usually multi-asset strategies that offer investors an asset allocation appropriate for their risk profile, selecting mutual funds as portfolio building blocks. Exchange-traded funds (ETFs) and other investments can also feature, but for reasons of simplicity and operational ease are less favored.
We ask providers to describe their portfolios' content as either active, passive, or blended (a mix of active and passive holdings). Since our first study in 2022, we have seen a decrease in portfolios using the "active" label from 61% of portfolios, to 48% at the end of July 2024.
Going a step further, we put the "active" label under the microscope, looking at portfolios' underlying holdings to see how they are actually invested. Here, we only consider portfolios active if they have less than 25% exposure to index funds, passive if they have greater than 75% exposure to index funds, and blended if their index fund allocation falls between these thresholds. This exercise puts the "true" share of active portfolios still lower at 37%—the full results are shown in the chart below, revealing how far this trend has advanced in the space of just two years.
Continued Pressure on Costs
Why the growing share of passive and blended managed portfolios, and the increased use of index funds? An obvious answer is the commercial pressure to lower costs.
We measure overall costs as management fees, plus the cost of underlying portfolio holdings. The median combined costs of active, passive, and blended managed portfolios all now stand slightly lower than in 2022, when we carried out our first study. This has mainly come from slow but steady reductions in underlying holding costs.
Taking "active"-labelled portfolios in isolation, we can see a modest but progressive reduction in the median "look-through" cost of their underlying holdings. And in fact, both the blended and passive groups have also lowered the cost of their underlying holdings over the same period. Meanwhile, median management fees—charged by their providers—for active and blended portfolios have held steady at 24 basis points, while those for passive offerings have crept lower from 15 to 12 basis points since our first study in 2022.
Putting the components of costs together, UK managed portfolios in GBP allocation Morningstar categories maintain a median total cost advantage of around 20-25 basis points against the clean share classes of similar, multi-asset mutual fund peers.
Why has it been tougher to outperform, the higher the equity weighting? One possible explanation: it's been a difficult period for active equity managers both to keep pace with mega-cap-driven rallies, and to show consistency through some big turning points in style leadership since mid-2019.
Looking at which portfolios produced the highest total returns by Morningstar category, also seems to bear this out. In the most aggressive 80%-plus equity category, only two active portfolios made the top 10 over the five years to the end of July 2024. Active and blended portfolios made a better showing in other, less equity-driven categories.
Lightening up on equities in favour of adding to fixed income, as many multi-asset managers did following bonds’ selloff in 2022—would also have left some gains on the table.
With equities providing most of the returns over this period, this all has a larger relative performance impact on the most equity-heavy allocation strategies.
