Either or? Understanding key differences between multi-asset funds and model portfolios

‘Active versus passive’ and ‘growth versus value’ are among the most common debates within the investment industry. Over the last decade or so they’ve been joined by another: multi-asset funds or managed portfolios?

At first glance, these two investment approaches may appear similar, as both aim to deliver diversified exposure through a blend of asset classes. However, important structural differences and their resulting implications can make one approach more appropriate than the other, depending on a client’s specific objectives and preferences.

In this article, we outline each approach and explore these differences to demonstrate how they can determine client suitability.

Multi-asset funds combine different investment types to enable a more diversified portfolio. These funds are managed by professional fund managers, who decide how to allocate the investments. Some multi-asset funds invest directly in a blend of assets, whereas others invest in other funds. Fund providers typically offer a range of options (often five), each aligned to a different level of investment risk, from from lower-risk options with less equity exposure, to higher-risk portfolios with more equity exposure that are aiming for greater long-term returns. The adviser or investor selects the fund that best matches their risk tolerance and investment goals.

Model portfolios, meanwhile, are pre-constructed investment portfolios that are created, managed, and rebalanced by a fund manager or adviser. They typically consist of managed investment products such as OEICs or ETFs. Advisers assess each client’s risk tolerance, investment goals, and time horizon to match them with a model portfolio that aligns with their individual profile.

Multi-asset funds gained popularity in the early 2000s and experienced a surge in demand following the 2008 Global Financial Crisis, driven by demand for diversified, risk-managed investment options that could better withstand market volatility. Model portfolios began gaining significant traction more recently. Their growth was in part influenced by regulatory changes, such as the Retail Distribution Review (RDR) at the end of 2012, which prompted advisers to outsource their investment processes and focus more on holistic financial planning for their clients.

Multi-asset funds gained popularity in the early 2000s and experienced a surge in demand following the 2008 Global Financial Crisis.

As noted above, multi-asset funds and model portfolios differ in structure. A multi-asset fund is a single investment vehicle, in which the client holds shares. The underlying assets (such as equities, bonds, or property) are owned by the fund itself rather than by the client directly. In contrast, a model portfolio typically consists of a collection of individual funds held directly by the client, usually via a platform.

This structural difference has implications for cost, transparency and tax, which we outline below.

Both multi-asset funds and model portfolios are generally regarded as cost-effective means of investing. Where they differ is visibility. Multi-asset funds typically offer a more straightforward and visible fee structure than model portfolios. With a multi-asset fund, clients pay a single ongoing charge figure (OCF), which is clearly disclosed and includes all underlying investment and management costs. In contrast, model portfolios often involve layered fees, including charges for the underlying funds and discretionary portfolio management, which can make it more complex to explain total cost of ownership to clients. This difference in fee visibility can be an important consideration when discussing value and suitability with clients.

Multi-asset funds and model portfolios provide differing levels of transparency, and so it’s important to consider what level of detail a client requires and is willing to pay for. In a model portfolio, clients and advisers have visibility of all underlying investments, with each recent transaction itemised – often described as a ‘look through’. Multi-asset fund reporting is much less granular in comparison. While clients can access the fund’s performance and fund holdings can typically be accessed via a factsheet or other investment literature, they generally don’t have visibility of the individual assets’ performance and it can be harder to see recent changes in the portfolio.

While multi-asset funds and model portfolios can both be subject to capital gains tax (CGT), there are important differences that could determine client preference between these two investment approaches. When investing in a multi-asset fund, a client would only be potentially liable for CGT when they sell their investment in all or part of the fund. However, a client invested in a model portfolio faces a more complex tax situation. Because they hold the underlying investments directly, model portfolio clients can be liable for CGT when any of the investments are sold at a profit. Recent changes to CGT as part of the Autumn Budget mean that clients could now pay even more tax when investments in their portfolio are sold at a profit. This makes it even more important to help clients plan carefully and make use of tax-efficient accounts like ISAs and pensions, which can help protect gains from CGT.

The investible universe for multi-asset funds is typically broader than that of model portfolios due to structural and platform-related factors. Multi-asset funds, managed within a single investment vehicle, can access a wide range of asset classes, including investment trusts and ETFs, without being constrained by platform limitations. This greater choice can contribute to lower costs. In contrast, model portfolios are subject to the capabilities of their investment platform, which can restrict the inclusion of certain asset types and therefore narrow their investment scope compared to multi-asset funds.

When investing in a multi-asset fund, a client would only be potentially liable for CGT when they sell their investment in all or part of the fund.

While multi-asset funds and model portfolios both aim to deliver diversified investment solutions, their structural differences can have meaningful implications for cost, transparency, and tax. Understanding these distinctions is key to selecting the most suitable approach for each client. By aligning the investment structure with a client’s individual goals, risk tolerance, and preferences, advisers can help ensure a more tailored and effective investment experience.