Jake Elmhirst from Coller Capital speaks to James Dunn from The Inside Network on what private equity secondaries are. The Inside Adviser
As the biggest ETF provider in Australia, Vanguard has the right to crow about another knockout performance over active equity. But invective commentary is a red flag, especially when it’s based on something as changeable as recent market performance.
Have we reached peak model portfolio?
The Australian financial services industry has a habit of overinvesting in the latest shiny new sector, which leads to an awkward adolescent phase whereby the market needs to contract while it simultaneously expands.
We’ve seen this happen with investment platforms, which began with legacy master trusts before rising through the wrap platform era and absolutely roaring through the managed account phenomenon until, most recently, entering a contractionary period due to an overabundance of providers in an immature market. In the last year we’ve seen a flurry of M&A activity as the industry right-sized itself and smaller platforms were swallowed up, while at the same time platform inflows grew by a staggering $26 billion to $195 billion.
But the investment platform space isn’t the only one with expansionary plans so ambitious they outstrip the kind of growth other sectors would kill for. The model portfolio sector is shaping up to go the same way.
There is an incredible rush to bring model portfolio offerings to market from every corner of the advice ecosystem. From platform providers to licensees and advice groups, researchers and asset consultants, the list of service providers casting themselves as mini fund managers is growing exponentially.
The model portfolio rises
During the ascent of managed account-enabled investment platforms, the only scaled model portfolio providers were the platform providers themselves. Advisers transferred vast tranches of client funds out of laboriously constructed investment portfolios that were sitting on legacy wrap platforms and onto sleek, risk-adjusted model portfolios on next-generation managed account-enabled platforms.
Then came the licensees, a cohort which grew considerably during the 2010s as traditional dealer groups were joined by advice firms reacting to the industry’s burgeoning conflict issues by opting for independence. As the advice groups became licensees and grew in scale they naturally shifted to managed accounts to take advantage of the inherent efficiencies. Once embedded on these platforms, mid-sized groups realised that managed accounts were just codified versions of the portfolios they were already constructing, with the ability to tweak asset allocation more readily.
All these independently licensed advice groups needed to do was pay an asset consultant $300,000 p/a to run a clutch of risk-adjusted portfolios, or get their own CIO to lead an in-house investment committee (which would likely cost the same). Whatever nomenclature they used for fee arrangements (managed account fee, portfolio fee etc), it meant they could keep it in-house (together with the RE fee) and join the industry’s latest foray into vertical integration.
(Of course, advisers now also have the option to whitelabel model portfolios from other providers. But this should be classified in the same bucket as using another provider’s model. It’s essentially the same thing, but the adviser is paying a few extra basis points to rebadge it as their own. No new product comes to market.)
The next group to jump on the model portfolio bandwagon – the research sector – is just now hitting its stride. The bigger research houses like Lonsec, Morningstar and Zenith were well-placed adopters, and now even smaller research groups and asset consultants like Evergreen are offering model portfolios.
I’ll eat a fermented herring if Chris Lioutas, Tim Murphy and their newly rebranded ‘Genium’ consultancy isn’t offering a suite of model portfolios by the end of next year.
The post peak phase
The inevitable glut of supply will lead to a correction, but it won’t take the same shape as the investment platform sector’s contraction because M&A will be a lesser factor.
Licensees will continue to run their own model portfolios because they’re in the black once they’ve recouped the investment management cost. But they will give up trying to flog them to other groups. Dozens of licensees have gone to market with their model portfolios, and none have really succeeded in selling it beyond their own client base. The channel doesn’t work. If an advice firm doesn’t have the scale and/or wherewithal to run their own model portfolios, they’ll use their primary platform’s models. If they have a little scale, they might whitelabel one. But they won’t use a competitors.
Research houses and asset consultants will have to essentially become fund managers now as they jostle to position their model portfolios to advisers and licensees, which means they’ll have to be very careful about the way they manage conflicts (watch that space). Commercially, they’ll increasingly need to find ways to distinguish themselves. The cachet that comes with research expertise won’t be enough, and they’ll likely move towards more niche, sector-based and themed model portfolios.
Asset consultancies and research houses will find a market for their model portfolios, but they’ll go through their own contractionary period – just like investment platforms.
Names like Innova, Brad Matthews, WLM, IPS, Aeqitas, Antipodean, Resonant, Evidentia, Drummond Capital, Bellmont and Quilla are all quality investment consultancy businesses that stand up, but many will find themselves involved in M&A as further players come to market. When they do begin to coalesce and gain scale, even more model portfolios will come to market. That eventuality could send the model portfolio sector over the edge, resulting in the inevitable contraction.
So no, we haven’t reached peak model portfolio. But it’s not far away.
