Cutting through the investment choices
Bespoke, model-based or off-the-peg? We highlight the bewildering array of choices facing well-heeled investors
For the well-heeled there is no shortage of options when it comes to investing. Competition among the multitude of asset management firms is fierce with wealthy clients being offered varying degrees of customisation. But what suits one investor might be a poor choice for another depending on individual circumstances.
The most deluxe option - purely bespoke - is not going to provide the best solution to those with very simple investment needs. Meanwhile, even those with relatively small portfolios might need a more customised option if their financial situation is complicated. So what are the pros and cons of the various offerings?
Bespoke serviceMeticulously tailored to suit individual needs and preferences, this service is pitched at larger portfolios - at Close Brothers Asset Management, for example, it is about £1 million upwards but the level varies from firm to firm - to justify the additional time spent managing the relationship.
"Aside from giving the fund manager maximum flexibility to chase the highest returns, investments in off-the-peg funds are tax efficient"As one might expect, there are certain perks to this high-end option. For a start, in addition to reflecting very specifically the client's risk appetite, the portfolio can also accommodate their particular quirks and philosophies. A bespoke service means that the client can phone the fund manager to talk through investment choices on a regular basis.
There are potential drawbacks to a highly individualised solution. For example, the more constraints placed on the investment manager, the more difficult it becomes to generate the best returns. Some data suggests that in terms of pure capital growth, 'off-the-peg' funds can be best. Close Brothers' funds that are focused on growth have returned 26% in the three years to March 2014, compared with 19% for the firm's bespoke clients. Returns on funds at each level of risk appetite - including conservative and balanced - show the same pattern.
Model-based approachThe mid-point in terms of customisation, the model-based approach is adapted to a customer's general appetite for risk, with the different portfolios tracking the firm's house views.
26%
The return on Close Brothers funds focused on growth in the three years to March 2014
A portfolio can be geared for growth, income, or a combination of the two, with the asset allocation varying, say, from about 65% equity and 35% fixed interest through 50/50 to 35/65.
In addition, it is usually possible to exclude the shares of companies in which the client holds directorships or about which they might possess inside knowledge. Finally, there is usually some degree of personal contact - though typically with the adviser rather than directly with the investment manager.
The benefit from a firm's perspective is that extra clients can be added at minimal extra cost.
Off-the-peg fundAlthough providing the lowest level of tailoring, off-the-peg funds are certainly not without merit. Aside from giving the fund manager maximum flexibility to chase the highest returns, such investments are tax efficient. Trading within both bespoke and model portfolios can generate capital gains tax liabilities.
The fact that investors can buy in units also makes them more affordable for those with modest portfolios. Finally, fees may also be lower, since less personal contact is involved. The downside is that such funds cannot accommodate any restrictions, unlike the two other forms of service. That can be a dealbreaker for investors who might face very specific compliance requirements or have other preferences, or reasons to invest in a certain way.
The original version of this article, written by Chris Alkan, was published in the June 2014 print edition of the Review.