In an environment of ongoing fee compressions, model portfolio expenses are top of mind. Many investors focus on a model portfolios investment management fee relative to similar investment styles and approaches to determine if it is priced appropriately. This is a problem because it doesn’t incorporate the total costs associated with implementing a model portfolio. To better understand the cost of a model portfolio we break down the total cost of ownership.
What is the investment management fee
The investment management fee can generally be broken down into two parts :
1. Weighted Average Management Cost: is the weighted average costs of the underlying investments, such as ETFs and Managed Funds, included in the model portfolios. It is the investment managers responsibility to understand the fee’s associated with each vehicle included in the portfolio and to manage the weighted average management cost.
2. Investment Management Fee: This is the fee an investment manager will charge for the ongoing investment management services related to the model portfolio. Services include rebalancing to target weights, and monitoring and responding to market changes. This additional fee is being compressed to zero, due to a global trend where investors are no longer willing to accept this fee when proprietary products are the underlying assets within the model portfolio.
Where the model portfolio is implemented as a non-unitised registered managed investment scheme, for example a separately managed account, a Responsible Entity manages the scheme. In most instances the Responsible Entity will charge a fee, and this may be described as, or be recouped from, the investment management fee. The Responsible Entity can also be the administrator, and may have limited involvement in the investment management of the model portfolio, delegating these duties to an investment manager. It’s important to understand the party that benefits from the investment management fee. The product disclosure statement can provide details.
Look Beyond Headline Costs
Investment management fee’s is just one of the components of the total cost of ownership for a model portfolio. There is a range of other costs to consider beyond this headline. The model portfolio administration cost for different asset classes and trading cost are such examples. These costs can fluctuate significantly and can potentially reduce investors returns.
Figure 1: Model Portfolios the Total Cost of Ownership
1 Rainmaker Advantage, December 2019.
A model portfolio is a collection of assets owned by the underlying investor and continually managed by professional investment managers. Model portfolios employ a diversified investment approach to target a particular balance of return and risk or portfolio objective
Typically, Australian investors access model portfolios via managed accounts. Managed accounts is the general term that refers to the type of product or service where the underlying securities are owned by the investor.
State Street Global Advisors defines a model portfolio as a collection of assets owned by the underlying investor and continually managed by professional investment managers. Model portfolios employ a diversified investment approach to target a particular balance of return and risk or portfolio objective.