Advisers often ask us: what’s the difference between a multi-asset fund and Unitised DFM? Read for a detailed explanation of unitised Discretionary Fund Management (Unitised DFM) by Duane Hasnip, Client Manager at GAM.
There seems to be a lot of confusion about ‘unitised DFM’…
There were already a myriad of multi-asset options available to retail clients; active multi-asset funds, funds of funds, manager of managers, active asset allocation solutions built using passive building blocks, completely passive strategies, model portfolios direct with a DFM, model portfolios on platforms and now, the new kid on the block, unitised DFM. Is it just marketing spin? It’s certainly causing some confusion amongst advisers and researchers, some of whom are creating whole new categories of research to put these Unitised DFM propositions into.
But the concept of Unitised DFM is actually very simple. Its purpose is to blend the efficiencies and importantly, the transparencies and regulatory benefits of a fund structure, whether that be, a fund of direct multi assets, a fund of funds or manager of managers or indeed a mixture of these, with the service proposition of a DFM, things like the bespoke upfront proposals and bespoke quarterly valuations and even access to portfolio managers.
So, why all the confusion? My thoughts are that many investment managers offering Unitised DFM solutions are over complicating things.
So let’s try to simplify.
What is unitised DFM and why is it needed?
Unitised DFM can be thought of as a half-way house between a DFM model portfolio service and a multi asset fund of funds. As I mentioned above, it is designed to combine elements of both; the DFM model portfolios are simply wrapped in a fund structure. But let’s not forget that essentially it’s a multi-asset fund that comes with reporting that is more than just a generic fund fact sheet that would typically be issued for a fund.
But why is there a need for this, let’s face it, initially more complicated solution of model portfolios that we, the advisers, need to explain to a client?
Clients like to feel special. They like to feel that they are the adviser’s only client. But, with the ever increasing focus on fees, advisers have to balance the service level they offer, with the fees that they charge for that service. If the investment manager can help provide granular, bespoke reporting for a client, there is a ‘value add’ in that it eliminates what I was once told (to my original bewilderment) was ‘fact sheet risk’. This is the confusion the client experiences when they see a fund fact sheet dated the end of the month/quarter, that doesn’t tally with their own actual returns, because, guess what, they invested on the 16th of the month rather than the first business day of the month or quarter. So we can see why transparent DFM-style reporting can add value over a standard fund fact sheet for both the adviser and the client. Not all will want to use it for clients, but for those who offer it, it is available.
The next question therefore, is why a fund structure?
Why a fund structure indeed; isn’t this just a way for investment managers to earn more fees by double charging if they buy their own funds? Well (unfortunately) for the investment managers (but importantly for the investors), no. FCA regulated and recognised funds cannot double charge if they buy their own funds in a portfolio. So why do it? One simple reason is access – it is much easier to create and manage a fund, than it is a model portfolio on a platform. Why? Well, the investment manager can buy whatever it chooses to, irrespective of whether or not a particular fund or asset is available on a specific platform. Also, the portfolio funds will be managed on a daily basis rather than how model portfolios on platforms are often managed (i.e. with quarterly rebalances) this is vital point given that markets do not move on a quarterly basis. Go figure!
There are other benefits. It is much easier to get the unitised versions of the model portfolio funds onto platforms in the first place. Portfolio trades within a fund structure are free of CGT. The trading costs are pooled and more importantly, are transparent to the investor. The AMC and TER/OCF are easy to see and understand. There are no costs-per-line-item trade. Whilst these trading costs are usually not applicable for platform model portfolios, they will obviously still apply for a model portfolio held directly with a DFM. In addition, there is no need for a DFM agreement, as you are simply buying a fund. There is no need for that messy repapering exercise if you decide to change the investment provider. One point worth mentioning, that advisers and their clients seem to focus on is that because the investment is in a fund, there is no VAT applicable!
Investment managers have created the Unitised DFM space to plug an advice gap, with (cliché I know) a value add focused proposition. Advisers have been very focused on adding genuine value post RDR. Investment managers should be doing the same.
Hopefully I’ve explained the rational and the benefits of this relatively new solution from investment managers. And indeed helped to simplify what the investment management industry has over complicated for far too long.
Note that the views Duane has expressed here are his own and not necessarily the views of his employer.
Later this month – Monday, May 20th – GAM are hosting their annual Investment Conference in London. The full details and registration link are below. We’re delighted to let you know that GAM have extended the invitation to our DISCUS readers. We hope to see you there!
GAM UK Investment Conference
GAM will bring together a select group of investment managers to share their insights on the outlook for specific asset classes and the strategies that they manage.
When // Monday, 20 May 2019
Where // Four Seasons Hotel London at Park Lane
Timing // 8.30am until 1pm, followed by lunch
You can register here
This article was create for the DISCUS website, based on an original post about Unitised DFM created by Duane Hasnip, Client Manager at GAM. You can find out more about GAM’s investment services here ›