Much is made of the spectacular rise of model portfolios as a serious competitor to traditional multi-asset funds over the past ten years.

As the MPS market enters maturity, though, there are a couple of question marks that hover over this product – namely, can this remarkable level of growth continue? Or will capital gains allowance cuts cause everyone to change their minds and flood back to multi-asset? 

But slow down. As someone who spends almost as much time chatting to DFMs and sales teams as an adviser, I feel these concerns are overdone. There’s enough room for both MPS and multi-asset funds to live together in harmony among the solutions of most providers, without pinching assets from the other. 

Here’s why a peaceful co-existence between the two solutions could be beneficial for all parties. 

Where are we right now?

A brief glance at the most recent Nextwealth report shows that as it stands, multi-asset funds are the most widely used investment strategy, though they don’t attract as much new money nowadays as in their peak. 

On the other hand, MPS solutions have been growing and growing and the market is becoming ever more saturated – one DFM I spoke to recently said ‘the market isn’t demanding more’. 

So it seems we are not far off a critical juncture whereby MPS usurps multi-asset as the primary solution for advisers in AUM terms – though such competition is no bad thing for the consumer. 

Benjamin Reed-Hurwitz, research head at ISS Market Intelligence, explained how the dynamics have changed.

“My data suggests that models have crowded out the room for unitized multi-asset to expand into,” he said. 

“And now multi-asset really has to prove an extra advantage to really make up ground because it's sort of the competitor, the upstart, in a sense, even though they are in many cases much older.”

What about taxable assets?

To sing the praises of multi-asset for a moment, then, there are a number of advantages to the fund-of-funds solution. 

Such a structure allows for more nimble tactical trades, avoids platform rebalancing headaches, can invest in a wider and more esoteric range of assets, and, of course, the key benefit that gets everyone talking – redemptions are exempt from capital gains tax. 

But just how important is being tax exempt? 

Reed-Hurwitz pointed out that three-quarters of the MPS sales that ISS covers go through ISAs and pensions, meaning that individuals with taxable GIA accounts are relatively scant in the grand scheme of things. 

Tax bills are also only one form of deductor to client returns – in the past, uncompetitive fees on multi-asset products have detracted from returns too. The MPS world, which is already hyper-competitive on price, may soldier on even as a relatively small tax implication is added to the list of costs. 

Mark Northway, investment manager at Sparrows Capital, said there’s a lot of ‘background noise’ around perceived tax implications emanating from fund marketers in particular. 

“Unless an MPS is particularly actively managed, the ongoing impact of changes to CGT allowance or percentage is limited to gains on rebalancing, and the occasional fund switch,” he said. “For passive implementations these are generally minimal and, to the extent they do occur, act as a pressure release valve to limit the amount of unrealised gains in a portfolio.”

What does the future hold? 

To answer this, we must briefly return to a different Nextwealth stat, which states that almost 80 per cent of financial advisers that use discretionary MPS also use multi-asset funds in their range of offerings. 

It argues for conjunction, not rivalry, between wrappers.

And one recent launch gave us a taste of what the future may hold for the industry. Premier Miton debuted their suite of model portfolios in June, using a combination of their own underlying multi-asset funds to make up the asset allocation. 

This allows for all of the rebalancing and esoteric asset ownership, except it’s coated in an MPS wrapper. 

Indeed, we’ve heard that advisers nowadays seek from providers a complete suite of solutions – both in multi-asset and MPS form – in order to cover all client needs and tick all boxes. 

So perhaps there will come a day when DFMs will cover all bases and offer advisers les deux, though for now most providers have a clear preference and expertise in just one of the two. 

In the meantime, however, Asset Allocator will keep you duly informed as to the direction we’re headed.