Post-RDR market expectations high for new FE model portfolios

Growing demand for outsourced fund selection and model portfolio construction in the wake of the UK’s Retail Distribution Review is expected to be a key driver of FE’s new services proposition, the fund data company said.

FE suggests that the effects on the UK market for financial advice of RDR means that increasing numbers of financial advisers are likely to seek outsourced services, such as model portfolios, in order to improve their own ability to show clients that they are adding value, as well as facilitate ongiong communication and explanation to clients about the performances of their investments.

In response to these developments the company has launched a range of FE Select Portfolios and a FE Select 100 shortlist of funds.

The 15 FE Select Portfolios launched will be split into three groups of portfolios of actively managed funds, corresponding to short, medium and long term investor horizons. Each group of five portfolios in turn will seek to match a spectrum of risk appetite, from low through medium to high. The range of risk will measure from about 2.5% to just under 20%, said Rob Gleeson (pictured), head of FE Research.

The model portfolios also rely on the availability of funds shortlisted for the FE Select 100. This shortlist is in turn developed on the basis of FE’s quantitative and qualitative products and services including Adviser Fund Index – which tracks the actively managed fund choices of UK IFAs – Alpha Manager and Crown Fund ratings, which rely on quantitative measures of risk adjusted performance, and its GroupAward rating, which looks at how all assets under management at groups perform.

FE has built up its fund selection model on the basis of using volatility risk and correlation as a better indicator of the future performance of individual funds. While such risk can itself go through periods of unexpected swings – such as during late 2008 when correlation between assert classes was upset by the collapse of Lehman Brothers and ensuing financial crisis – it has over time proven a more stable measure to use for indicating future performance than others, Gleeson said.

The results at the fund level are also overlaid with asset allocation and stochastic modeling for indications about the future performance of asset classes. FE argues that its approach provides access to a more granular level of performance indicators for individual funds in the model portfolios than just relying on asset allocation per se.

The model portfolio service is intended to be an ongoing proposition for users. For example, FE’s own databases will be scanned continuously for quantitative warning signs that funds in the portfolios and on the shortlist may be at risk of underperforming, and any such information relayed to users. Both the model portfolios and the Select 100 list are subject to revisions every six months, in line with the rebalancing of FE’s ratings tools.

The emergence of demand for model portfolio services as financial advisers in the UK market gear up for RDR has also had a bearing on the business model. FE is proposing a sliding scale of costs to users, depending on factors such as whether they are a small or larger organisation. The pricing model is intended to start with a flat fee of £5,000 for smaller firms with less then £50m under management, although larger firms will be able to negotiate deals. This will make the proposition competitive in the market, especially against model portfolio services that currently target discretionary fund managers and which may be more expensive, FE said.

However, it is also imporant to ensure there is flexibility built into any solution because the UK FSA has indicated that it is not supportive of the idea that all advisers would seek to shoe-horn clients into standard model portfolios. Where clients do ask for adjustments, such as a different number of portfolios than the 15 the service is launching with, then FE would consider those requests. Access to the model portfolios through platforms is another development yet to be finalised, but discussions are ongoing with the likes of Transact and Skandia bout this, FE said.


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