MPS, Multi-Asset Funds and DFMs: What Is the Difference?
Investors rarely choose every individual investment held within their portfolios. Instead, most invest through a professionally constructed solution intended to provide diversification across different markets and asset classes.
These solutions are often described using terms such as ‘model portfolio service’, ‘multi-asset fund’ and ‘discretionary fund manager’. The terms are sometimes used interchangeably, but they do not describe exactly the same thing.
A discretionary fund manager, or DFM, is the investment manager responsible for making decisions. A model portfolio service, or MPS, is one way in which a DFM can deliver those decisions across multiple client accounts. A multi-asset fund is a pooled investment fund that holds a mixture of asset classes.
The portfolios may look similar from a distance, but their legal structure, implementation and operation can be quite different.
What Is a Discretionary Fund Manager?
A discretionary fund manager is an investment firm with authority to make investment decisions on behalf of its clients.
The Financial Conduct Authority describes portfolio management as managing portfolios under mandates provided by clients on a discretionary, client-by-client basis. The important word is ‘discretionary’. It means that the manager can buy and sell investments without requesting the client’s approval before every transaction.
The client agrees to a mandate setting out matters such as:
The portfolio’s investment objective;
The permitted level of risk;
Any restrictions on the investments that may be used;
The extent to which the portfolio may depart from its strategic allocation; and
Whether income or capital growth is the primary objective.
The DFM then manages the investments within that mandate.
Historically, discretionary management was often associated with individually tailored portfolios for wealthier clients. A manager might construct a bespoke portfolio of shares, bonds, funds and other investments around the client’s tax position, preferences and existing holdings.
Bespoke discretionary management still exists, but many DFMs now also manage standardised model portfolios. This is where an MPS enters the picture.
What Is a Model Portfolio Service?
A model portfolio service is a collection of centrally managed portfolios, usually designed for different risk levels or investment objectives.
For example, an MPS provider might offer five portfolios:
Cautious;
Moderately cautious;
Balanced;
Moderately adventurous; and
Adventurous.
Each portfolio has a target asset allocation and a selected group of underlying investments. Rather than designing a completely different portfolio for every investor, the manager applies the same model to all clients assigned to that portfolio.
However, each investor normally owns the underlying funds or securities through their own platform account. The investments are not necessarily combined within one pooled fund.
The financial adviser is generally responsible for assessing the client’s objectives, attitude to risk, capacity for loss and broader circumstances before recommending a suitable portfolio. The DFM is then responsible for managing the selected model within its mandate. Both investment advice and portfolio management are subject to suitability requirements under the FCA’s conduct rules.
When the manager changes the model, the corresponding trades can be applied across the accounts of investors using that model. This allows the DFM to make changes without the adviser obtaining fresh approval from every client for every transaction.
An MPS is therefore not necessarily a separate investment product. It is better understood as a method of delivering discretionary portfolio management.
What Is a Multi-Asset Fund?
A multi-asset fund is a pooled investment fund holding more than one type of asset.
Depending on its objective, it may invest in:
Global equities;
Government and corporate bonds;
Property;
Infrastructure;
Commodities;
Cash;
Alternative strategies; and
Other investment funds.
The investor purchases units or shares in the multi-asset fund. The fund manager then decides how the assets inside the fund should be allocated.
From the investor’s perspective, the entire solution may appear as one holding on the investment platform. The investor does not directly hold each underlying equity or bond fund. Instead, the investor owns units in the multi-asset fund, which owns the underlying investments.
‘Multi-asset’ is a broad description rather than a guarantee of any particular management style. A multi-asset fund might be actively managed, largely index-based, managed to a fixed asset allocation or allowed to move substantially between asset classes.
Some funds target a particular volatility range. Others are labelled according to risk, expected equity exposure, income requirements or a targeted outcome.
The Central Difference: Separate Holdings or One Pooled Fund
The easiest way to distinguish an MPS from a multi-asset fund is to examine what the investor actually owns.
In a typical MPS, the investor’s platform account might show holdings such as:
A UK equity fund;
A global equity fund;
An emerging-markets fund;
A government bond fund;
A corporate bond fund; and
A cash or money-market fund.
The DFM decides how much should be allocated to each holding and makes changes when required.
In a multi-asset fund, the investor’s account generally shows a single holding. The mixture of equities, bonds and other assets sits inside that fund.
Both approaches can produce a diversified portfolio. The difference is primarily in their structure and implementation, not simply in the investments they hold.
How Does Rebalancing Work?
Suppose a portfolio begins with 60% in equities and 40% in bonds.
If equities subsequently outperform bonds, the allocation might move to 65% equities and 35% bonds. The portfolio now contains more equity risk than originally intended.
A manager may rebalance the portfolio by selling some equities and purchasing bonds, returning it towards its target allocation.
Within a multi-asset fund, this activity takes place inside the fund. The investor continues to hold the same number of fund units, apart from any subscriptions or withdrawals.
Within an MPS, the manager instructs trades in the underlying holdings held within each client’s account. The exact execution price and timing may differ slightly between platforms or clients, particularly where the model is available through several investment platforms.
Both structures can rebalance portfolios efficiently. However, the administrative and tax consequences may differ.
Tax and Capital Gains
Where an MPS is held outside an ISA, pension or another tax-efficient wrapper, sales of its underlying investments may create disposals for capital gains tax purposes.
A model change or rebalance could therefore crystallise gains or losses within the investor’s account.
By contrast, when a manager trades investments inside a UK-authorised pooled fund, the investor does not normally make a personal disposal each time an underlying holding is changed. A taxable disposal generally occurs when the investor sells or switches their units in the multi-asset fund.
This does not mean that a multi-asset fund is automatically more tax-efficient in every situation. Tax treatment depends on the investor, the account structure and the investments used. It does, however, mean that the location of the underlying transactions matters.
Inside an ISA or pension, capital gains tax is not generally the deciding factor, although costs, dealing arrangements and operational efficiency remain relevant.
Can an MPS Be Bespoke?
A standard MPS is not usually bespoke to each client. Investors within the same model broadly hold the same investments in the same proportions.
There may be limited variations. For example, an MPS might have:
Active and passive versions;
Income and accumulation versions;
Sustainable or conventional variants;
Different investment ranges for particular platforms; or
Portfolio-specific exclusions.
These variations should not be confused with a genuinely bespoke discretionary portfolio.
Under a bespoke service, the manager may take account of circumstances such as concentrated shareholdings, restrictions on particular companies, tax positions, income requirements or investments that the client does not wish to sell.
Bespoke management is generally more expensive and may only be available above a specified minimum portfolio size.
Is a Multi-Asset Fund Managed Discretionarily?
In an everyday sense, a multi-asset fund manager usually has discretion over the investments inside the fund. However, the regulatory and legal structure differs from discretionary management of an individual client portfolio.
The manager of a multi-asset fund manages the pooled assets according to the fund’s stated objective and investment policy. It does not normally construct a separate portfolio mandate for every person who owns units in the fund.
The FCA distinguishes between individual portfolio management and the collective management of investment funds. In individual discretionary portfolio management, investments are managed for clients under portfolio mandates. In collective management, investors participate in a fund whose assets are managed collectively.
This distinction helps explain why a DFM and a fund manager can perform similar investment activities whilst delivering them through different legal structures.
Who Makes Which Decision?
An advised MPS arrangement often involves three separate parties.
The financial adviser assesses the client’s overall circumstances and recommends an appropriate investment strategy or risk-rated portfolio.
The DFM constructs and manages the model. It decides which investments to hold, how much to allocate to each one and when changes should be made.
The investment platform provides custody, administration and trading infrastructure. It records the client’s holdings and processes the instructions generated by the DFM.
A multi-asset fund can also sit on an investment platform and be recommended by an adviser. However, the investment management occurs within the pooled fund rather than through a model applied to separate holdings in each client’s account.
These distinctions are important because responsibility for the initial advice, ongoing suitability, portfolio management and administration may sit with different firms.
Potential Advantages of an MPS
An MPS can give investors access to a centrally managed portfolio whilst retaining direct ownership of the underlying holdings.
Potential advantages include:
Professional asset allocation and fund selection;
Ongoing rebalancing;
The ability to replace individual underlying funds;
Clear visibility of the portfolio’s components;
Access to institutional or discounted fund share classes in some cases;
A consistent portfolio across multiple tax wrappers; and
Relatively rapid implementation of investment decisions.
Because the investor owns the underlying investments, there may also be greater flexibility when transferring the portfolio. In some circumstances, holdings can be transferred without selling them, provided that the receiving platform supports the same investments.
However, this is not guaranteed. A portfolio may use platform-specific funds or share classes, and a new provider may require the portfolio to be sold or altered.
Potential Disadvantages of an MPS
An MPS can also introduce additional complexity.
The total cost may include:
The DFM charge;
Underlying fund charges;
Platform fees;
Adviser charges; and
Transaction costs.
Model changes may create taxable disposals when the portfolio is held outside a tax wrapper. Differences in platform availability can also mean that nominally similar versions of a model do not always contain precisely the same holdings.
There can also be a temptation to treat the ability to trade quickly as evidence of added value. More frequent changes are not automatically better. What matters is whether the portfolio has a coherent investment philosophy, appropriate diversification and disciplined implementation.
Potential Advantages of a Multi-Asset Fund
A multi-asset fund can provide a relatively simple way to hold a diversified portfolio.
Potential advantages include:
One visible holding;
Internal rebalancing;
Straightforward administration;
No personal capital gains calculation each time the manager changes an underlying investment;
Consistent implementation for investors in the same share class; and
Easy portability where the fund is widely available.
Multi-asset funds can also be competitively priced, particularly where they use low-cost index funds or direct securities.
Their pooled structure can make them operationally convenient for smaller portfolios, regular contributions and withdrawals.
Potential Disadvantages of a Multi-Asset Fund
The simplicity of a single holding can reduce transparency. Investors may need to examine the fund’s reports or portfolio data to understand its true exposure to different markets.
A fund may also be less flexible. An investor cannot usually retain the equity component whilst removing one particular bond allocation. The fund is purchased or sold as a complete package.
There can be additional layers of cost where a multi-asset fund invests in other funds. The headline fund charge should therefore be considered alongside the costs of the underlying investments and the fund’s transaction costs.
Some multi-asset funds also make substantial tactical asset-allocation decisions. Investors should understand how much freedom the manager has to move away from the fund’s long-term allocation and whether there is evidence that this flexibility is likely to be used successfully.
Is One Approach Better?
There is no universal answer.
An MPS may be appropriate where an investor values transparency, wants the underlying holdings to remain visible and is comfortable with the operational and potential tax consequences of model changes.
A multi-asset fund may be preferable where simplicity, consistent implementation and internal rebalancing are priorities.
A bespoke DFM service may be appropriate where the investor has more complex requirements that cannot easily be accommodated within a standardised model or fund.
The quality of the investment process matters more than the label attached to it. An expensive and unnecessarily complicated MPS is not automatically superior to a simple multi-asset fund. Equally, a multi-asset fund should not be selected solely because it appears administratively convenient.
The relevant questions include:
What is the portfolio trying to achieve?
How is the long-term asset allocation determined?
How much discretion does the manager have?
How diversified is the portfolio?
What evidence supports the investment approach?
How often and why are changes made?
What are the complete costs?
Who is responsible for ongoing suitability?
What happens if the investor changes adviser or platform?
How will withdrawals, tax and rebalancing be managed?
Conclusion
MPS, multi-asset funds and DFMs are related concepts, but they describe different parts of the investment process.
A DFM is a manager with authority to make investment decisions within an agreed mandate.
An MPS is a way of applying a centrally managed portfolio across the separate accounts of multiple investors.
A multi-asset fund is a pooled vehicle that combines several asset classes within a single fund.
In practice, all three may be used to solve a similar problem: constructing and maintaining a diversified portfolio without requiring the investor or adviser to approve every individual trade.
The choice between them should depend on the investor’s circumstances, the quality of the investment process, the clarity of responsibilities and whether the solution provides good value after all costs are considered.