Last week we hosted the second of our new webinar series: Centralise Your Investment Proposition. During the insightful session delivered by Apricity’s Christian Markwick and our very own Alasdair Wilson, there were numerous questions raised which we have handily summarised below…

Q. Is active better than passive?

A. This is a debate that continues to rumble along despite all the research from both sides of the argument trying to prove each other wrong. In short, there is no right or wrong answer – both methods have their advantages and disadvantages, which are covered fully in the webinar!

In short, passive funds offer very low costs but their performance is limited to that of the index they are tracking. On the other hand, active funds offer a more hands-on approach by a fund manager for outperformance potential (nothing is guaranteed – plenty of active funds underperform their indices!) which adds cost. It is for you to decide which best reflects your firm’s values and, of course, your client base.

Q. Are external Managed Portfolio Services better than my in-house models?

A. Managing your own portfolios offers you the greatest flexibility in terms of the strategy and can be used to demonstrate additional value to your clients, particularly when saving on the MPS provider’s fees. However, you will then have to factor in your own research, the costs associated with research tools, getting additional permissions from your clients when recommending a switch and holding investment committee meetings. These all take time, which is also time spent away from your clients, who in turn make your money – not the independent investment research.

This again comes down to your own preferences, and how willing you are to keep on top of the administration required for running internal portfolios – there may be a time where you find you are having to stop taking on new clients to make enough time to maintain your internal models when, if it was outsourced to an experienced third party, you wouldn’t have to resort to that!

Q. Is ESG a fad?

A. Personally, I believe ESG is here to stay and will underpin how fund houses and investment managers select investee companies going forward.

The factors that make up the ESG guidelines should not be any hindrance to the performance of a fundamentally good business and, in fact, should promote the long-term sustainability (and in turn, investment viability) of any business.

As was noted in the webinar chat, the Deliveroo IPO is expected to be shunned by some major fund houses due (amongst a few other things) to the company’s questionable practices in terms of workers’ rights, and the founder retaining a 20 vote per share right compared to other shareholder’s one vote per share (and thus always providing the founder with the deciding vote – not very democratic!). Both of these factors will have contributed to the IPO being deemed to be too big of a risk to take by the fund houses on behalf of their investors, and certainly not in line with ESG guidelines.

This raises the broader question of whether clients are actually happy to invest in such companies when such issues are made clear, and why the regulators are keen to bring in additional measures to the fact-finding process when it comes to ESG considerations.

Q. Can a CIP apply to both in-house models and outsourced DFMs?

A. Yes – a centralised investment proposition can, in theory, apply to any investment (individual funds, funds of funds, MPS portfolios, bespoke DFMs, alternative investments etc) as long as the recommended strategy is ultimately deemed suitable for the client.

Q. What’s the starting point for building a portfolio in terms of asset allocation?

A. Usually, the recommended allocations will be provided by your risk profiling tool for you to build your portfolios in line with. The recommended asset allocations are typically decided upon by experienced investment professionals, rather than the adviser firm. Portfolio providers and risk tools will carry out thorough market analysis as to how they will expect each asset class to perform over the coming months and years, and adjust the allocation to reflect that.

Alasdair Wilson