Author: Tom Wiseman, Managing Director, Enhance London
Due to the continued and most regrettable expansion of my waistline over the festive period I found myself in the tailors last week to order a new and worryingly larger suit. Upon arrival at my chosen store I was met by an immaculately dressed young chap who, after some social pleasantries, asked me “off-the-peg, tailored or bespoke, Sir?”
Far from being offended I had to chuckle, earlier that morning a similar question of kudos had arisen during a discussion with a friend about the type of discretionary investment portfolio he required. In much the same way as suits, broadly speaking there are three forms of multi-asset portfolio management available to the private investor:
- ‘Off-the-peg’- A segregated model portfolio or a fund
These are centrally managed investment portfolios based on a specific risk profile or strategy. Clients that invest in a model or fund receive the same portfolio as all other investors in the product, essentially making it a ‘one size fits all’ arrangement.
- ‘Tailored’- A segregated portfolio with some flexibility for client preferences
These are segregated investment portfolios that have an overarching risk profile or strategy that applies to similar clients. But with the direct intermediation of a portfolio manager to adjust the individual client portfolio to account for specific preferences such as exclusions, biases and income requirements.
- ‘Bespoke’- A segregated portfolio built and managed individually for a client
These are segregated investment portfolios that are designed and individually managed for a specific client. The portfolio manager, within the context of the client’s agreed investment policy, has complete flexibility on when, where and how to invest without reference to an overarching risk profile or strategy.
As with tailoring, there is often a degree of associated snobbery regarding the type of investment portfolio one ought to have. Nothing fits and lasts quite like a bespoke suit, so surely our hard-earned capital deserves a bespoke investment portfolio to ensure the best possible fit and outcome? Perhaps surprisingly, the answer to this question in most circumstances is no.
In my experience, bespoke portfolio management is only viable when a client has a multi-million-pound sum to invest. Dealing with larger portfolio sizes enables the chosen portfolio manager to keep client numbers to a sensible level and ensures that sufficient due care and attention is applied to each individual portfolio under their advice.
One portfolio manager and his or her support team simply cannot hope to properly manage hundreds of individual portfolios with very different investment policies at the same time, which would be an economic necessity when managing smaller portfolio sizes unless their fees are exceptionally high. After all, portfolio managers are in the business of making money for themselves as well as their clients.
My friend in question has £2m to invest following the sale of his business. This of course is not insubstantial sum, but in my view, it is too small an amount to warrant bespoke portfolio management. My rationale behind this assertion is quite simple. I firmly believe that smaller investment pots are far better managed in a non-bespoke format where the portfolio manager and support team can concentrate on running a handful of portfolios on a collective, more institutional basis.
When a private investor employs any portfolio manager they are doing so primarily to access the intellectual capital of the portfolio manager and the attached investment house. To extract true value for money it logically follows that one would want to limit the practical constraints that dilute the portfolio manager’s ability to implement their expertise. Client numbers are one such constraint.
Therefore, tailored portfolios or models/funds are very often a better solution for a private investor as these forms of portfolio management provide access to a higher concentration of portfolio manager expertise and attention to the strategy in which one is invested. The trick is to select the best portfolio manager or fund on the market and the most suitable strategy for the client’s requirements.
Tailored portfolios are preferable over models/funds where clients have requirements that diverge from the core investment model, such as ethical or tax considerations for example, and where a personal relationship with a portfolio manager is deemed important. Like a tailored suit, a well-adjusted investment portfolio and service fits every bit as well as it’s bespoke counterpart.
My friend, despite being a particularly flash dandy with a penchant for bespoke suits, has no interest in investment markets nor any investment requirements that necessitate the individualisation of a portfolio. He is simply looking for long term capital growth from a diversified portfolio and so he is best served ‘off-the-peg’ by a model or fund.
Ultimately, every client should be assessed on their individual circumstances, objectives and attitude to risk but this does not mean that investment consultants or trustees need to overcomplicate the recommended investment solution. Many clients are very similar from an investment perspective despite for example, their differences in circumstances and lifestyle. It’s important to first establish the right investment mandate, then find the right people to do the job.
At Enhance our client portfolios include a range of underlying managers, some of whom will run a bespoke strategy for us. Others run models or funds. We are agnostic on the type of portfolio a manager offers if their strategy is appropriate for our client. We are employed to achieve the best outcome, not the best impression.