Key Takeaways
- Managed portfolio launches spiked in 2018-2022, but growth has slowed since.
- Active portfolios have lowered their costs the most.
- Sustainable and ethical funds feature prominently among the most-held active funds in UK managed portfolios.
Morningstar’s latest annual study of the UK managed portfolio market shows that two closely related trends remain firmly in place: costs are falling, and portfolio holdings are getting more passive.
Since Morningstar began studying the UK managed portfolio market in 2022, there’s been a steady decline in the median overall cost. This is likely in response to competition, and rounds of UK regulation adding to downward fee pressure for MPS and funds alike.
Grouping portfolios by their stated investment style—whether they invest mainly in active funds, passive funds, or a blend of the two—all have shaved some costs, and those in the “active” camp have lowered their costs the most.
Managed Portfolios Are Embracing Passive Funds
MPS have achieved lower costs not through lowering their own management fees, which have held firm, but through compression in the costs of their underlying portfolio holdings. The fees charged by underlying funds all count toward the total cost figure, so using cheaper funds lessens the overall cost to the end investor.
This tallies with the shifts in portfolio composition. In our regular studies, we’ve seen a continual increase in portfolios’ exposure to passive funds. This comes partly through new passive and blended portfolio launches, but there are also passive funds used to different degrees in portfolios marketed as “active”.
The stricter test shrinks the percentage of active portfolios from 44% to 31%. A sizeable number of active-labeled portfolios stray into the “blended” bucket, by diluting their active content with passive funds. Meanwhile the passive camp stays at about 30%, suggesting it is more true to label.
This chart highlights the speed of the embrace of passive, which is even greater using Morningstar’s stricter criteria.
Which Investments Are Most Popular Within UK Managed Portfolios?
Relying on platforms to replicate their model portfolios across many client accounts, MPS generally invest in open-end funds, providing a more seamless experience compared to trading in other vehicles like exchange-traded funds, closed-end funds or stocks.
Index funds almost completely dominate the top 10 lists of most-held equity and bond funds. For their core passive exposures, selectors gravitate towards a few large, well-recognized index providers. The resulting holding overlap squeezes out most active funds. For example, Fidelity Index US was the most-held equity fund in our study, and Vanguard US Government Bond Index the most-held fixed income vehicle.
Among active funds, sustainable and ethical funds feature prominently among the most-held. Nearly one quarter of managed portfolios state some sustainability aims, but their managers fish in a smaller pond of active funds that can fit the bill. Several equity income funds also have a wide following, potentially because while passive approaches exist in this space, they can miss the mark for this type of strategy.
Among active equity funds held by MPS, Royal London Sustainable Leaders Trust is the most popular, followed by Janus Henderson Global Sustainable Equity Fund.
ETFs Play a Supporting Role in Managed Portfolios
ETFs have a place in managed portfolios, but often for relatively niche investment exposures that don’t exist in a mutual fund format, including socially responsible or alternatively-weighted indexes. Aggregating all UK managed portfolios’ holding weights, ETFs receive only 7.5% of the present total allocation, while over 92% is in funds.
Active ETFs, a small but fast-growing corner of the UK and European asset management industry, so far barely feature in UK managed portfolios. There are only five different active ETFs held by as many portfolio providers, summing to about 1.5% of total ETF position weights. This is a lower take-up of active ETFs than in fund-of-funds, suggesting that at the moment there is little demand among managed portfolio providers for active strategies in an ETF wrapper.
Alternatives Use is Modest and Liquid
Compared to multi-asset funds, there’s a lower use of alternatives in managed portfolios, with an under 3% allocation on average. Although they can add diversification to a portfolio of equities and bonds, they can also add cost and complexity. Where they are used, the focus is mainly on liquid alternatives funds, such as trend-following, multistrategy, and macro trading strategies.
Closed-end funds can provide access to illiquid asset classes, such as direct infrastructure and renewables, but are more difficult to use in MPS, and make up only 0.4% of aggregate portfolio allocations. With institutions, regulators and some allocators showing interest in broadening access to private markets, it remains to be seen whether providers will try to find new, innovative means to include illiquid underlying assets in managed portfolio offerings.
What Are Managed Portfolios? And How Popular Are They?
Managed Portfolio Services, or MPS, are professionally run model portfolios used mainly by advisors for their clients. They let the advisor outsource the investment management, so they can focus on client relationships and financial planning.
While they can be thought of in place of a multi-asset fund, arguments for choosing MPS include greater scope for personalization, customization and control. Overall costs can also be lower, depending on several factors including investment style.
On-platform MPS, which are executed on investment platforms, have proliferated over the past decade or so. Morningstar’s UK Managed Portfolio database currently has around 1,500 live portfolios, offered by 70 providers. Although the numbers keep rising, portfolio launches have slowed after a big spike in inceptions between 2018-2022. This doesn’t signal less advisor appetite for using MPS, but more likely a sign of market maturity.
Note: This study doesn’t capture all costs to the investor, such as advisor and platform costs.
This article is taken from the UK Managed Portfolio Landscape 2025
