UK Managed Portfolio Sector Faces Increased Competition and Drive-Down of Costs

The UK managed portfolios sector is slowing in the number of new launches and is seeing a steady increase in the use of passive investments, contributing to a downward trend for costs, as reported in Morningstar’s latest UK Managed Portfolio Landscape for 2024. 

As of the end of 2023, the UK managed portfolio industry made up 14% of the total UK wealth management market.

The presence of active portfolios is decreasing. Since our 2022 study, the proportion of portfolios labelled “active” has declined from 61% to 48%. When we examine the actual use of index funds, using a look-through analysis, the number of truly active portfolios appears lower still.

“Nowadays, managed portfolio clients have a wide choice of offerings. Typical provider lineups include active, passive, blended, and sustainable investment styles, catering to a range of client risk levels. Such breadth and replication make the UK managed portfolio space a crowded landscape, creating difficulty for providers to stand out from competitors. The growing proportion of passive and blended managed portfolios, and the increased use of passive holdings in portfolios also reflects commercial pressure on costs.” – Tom Mills, Senior Manager Research Analyst, Morningstar

Key takeaways from the report include:

• Passive funds continue to dominate the list of most frequently held mutual funds, with broad equity and bond market index funds in especially wide use. Currently, less than 15% of managed portfolios in our database completely abstain from index funds.
• Managed portfolios are overwhelmingly multi-asset solutions, primarily using mutual funds as their building blocks. Listed underlying investments are not as common. ETFs make up around 15% of underlying holdings purely by number, and where they are used, ETFs with socially responsible investment or ESG policies are among the most held.
• While the earliest offerings in the Morningstar database date from 2004, 55% of managed portfolios in the data were incepted between 2018 and 2022, a period of fast expansion. The rate of new launches has since moderated, suggesting that this sector may be maturing.
• Judging the top 10 portfolios in each Morningstar category by total returns over the same period, we find that in the most equity-heavy GBP allocation 80%-plus equity category, managed portfolios using mainly passive holdings have enjoyed greater success than active peers. In other Morningstar model categories, active, blended, and passive styles are more evenly represented among the top 10 performers.
• Over five years to the end of July 2024, measured by the performance of the median portfolio in each category, more conservative categories have produced higher absolute returns than their Morningstar category indexes, but more equity-heavy categories have lagged their bogies. This reflects a challenging period for active equity managers, when market leadership has seen abrupt swings between value and growth styles, and mega-caps have mainly carried markets higher.
• The most-held active funds span a variety of Morningstar categories, and they mostly carry favorable Morningstar Medalist Ratings, suggesting that a key consideration by providers is quality. Several well-established sustainable or ethical funds retain their place in the top 10 most-held list.

Morningstar launched its UK Managed Portfolio Database, the first independently collected market database of UK managed portfolios, in 2022 with around 900 managed portfolios. As of July 2024, this number has increased to more than 1,200 portfolios, providing users with comprehensive data including independently calculated performance data, costs, and complete underlying holdings.

The full report can be found here >