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Do you know your DFM from your multi-manager fund?

Experts say unitised DFMs need to set themselves apart from multi-asset funds 


As the latest addition to the outsourcing menu, unitised discretionary fund management has generated plenty of column inches post-RDR. Research firm Defaqto defines unitised DFMs as collective investment schemes run by discretionary managers. It points out that some might mirror existing segregated portfolios while others could reflect the discretionary firm’s house view and investment style, with no segregated equivalent.

Unlike model portfolios, trading within a fund structure is free from VAT and capital gains tax – it is only upon disposal of the fund itself that capital gains tax becomes an issue. So advisers could bag their clients the investment processes of a DFM wrapped as a fund with a nice tax-efficient bow on the top.

The problem is  it is a grey area as to whether unitised DFMs are just another multi-manager/multi-asset fund.

GAM head of institutional and fund distribution Matthew Lamb says: “Unitised DFMs need genuine DFM features, otherwise they are just multi-manager funds that are built by DFMs, with no difference to any other multi-manager funds.”

Lamb says advisers could buy a multi-manager fund instead of using a DFM. “But I don’t think multi-manager funds allow financial advisers to demonstrate a lot of value – clients could just be put in a balanced managed fund. The problem is the adviser then buys four or five multi-manager funds and ends up with an index-plus feel to the client’s portfolio.”

As Lamb points out, there is a risk of over-diversifying through a portfolio of multi-manager funds, whereas DFMs tend to look after the whole of a client’s investment portfolio.  But he also highlights the potential drawbacks of model portfolios run by DFMs on a segregated basis. “Model portfolios are a great idea but for clients in the middle bracket with portfolios of £100,000 to £500,000, it’s a less efficient version of a multi-manager fund. If you don’t have an enormous amount to invest in a model portfolio the fixed costs can destroy the returns and costs are opaque, unlike multi-manager funds which have total expense ratios.”

Lamb says because trading within a model portfolio is not free of VAT and capital gains tax like a fund, the costs may affect how often managers rebalance portfolios.  “Many rebalance quarterly but the world doesn’t work on a quarterly basis,” he says.

For Lamb, a genuine unitised DFM is a hybrid of the best features of multi-manager funds such as cost effectiveness and the tax efficiency of a fund structure, with the bells and whistles of DFMs such as personalised reporting,  full transparency of holdings, the ability to make automatic Isa top-ups and regular capital drawdown to pay for things like school fees. 

“Some unitised DFMs try to differentiate themselves but to me they are just risk-rated multi-manager funds. Unitised DFMs should be more than just a fund structure but that is difficult to do because lots of firms are strong in asset management and not in DFM or are bigger in DFM than asset management,” he says.

Heartwood Investment Management head of intermediary sales Mark Rockliffe says unitised DFMs allow clients to get the same investment management regardless of the size of their investment, which meets the regulator’s requirement for consistency among clients with the same risk profile. 

“If you hold a model portfolio on a platform there are constraints in terms of assets you can buy or sell as that will depend on the platform. If you go unitised, the DFM owns the fund structure and has wide investment permissions. We don’t just invest in other funds – we can buy any investment to play investment themes directly, capture returns in the upside and protect the portfolio on the downside,” he says.

Thomas Miller Investment head of intermediary business development Matt Lonsdale says some discretion-ary managers see unitised DFMs as a way of providing access to their investment management in its purest form. He sees unitised DFMs as good for clients with smaller investments as they are a product rather than a service, so do not incur service fees.

“But for me, unitised DFMs are pretty much funds of funds with a different marketing brief,” he says. “The general reason people use DFMs is to get a level of service and to outsource risk to the DFM. But with unitised DFMs, you’re not getting anything bespoke and it’s highly unlikely that you’re getting a service – but you might be getting that based on fund selection.”

Lonsdale says it all boils down to what features the client will need and use, so he sees DFMs offering fully bespoke, model portfolios and unitised DFM options as a positive. “But advisers will need to do more due diligence across all three services as they will not necessarily be the same,” he says.


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