When selecting from hundreds of unique model portfolios available in Australia investors should consider a range of factors, including cost. Investors are encouraged to look beyond the headline investment management fee. Additional costs can vary, and can take away from investors returns.
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.
The investment management fee can generally be broken down into two parts :
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.
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
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.