A model portfolio, also known as a wrap fund, is a blended portfolio of financial instruments designed to achieve a specific risk reward return within an expected risk range over a set time horizon. In past years a model portfolio was typically made up of Unit Trusts/Collective Investment Schemes, but as custodian platforms have improved their capabilities a model portfolio can now potentially include many different financial instrument types. A model portfolio is a blend of asset classes that may include different fund managers, financial instruments and investment strategies – providing investors with the power of diversification.
A model portfolio is invested and administered via a custodian platform, for example Glacier or DMA. While investors do own the underlying units or shares – the overall portfolio is managed and rebalanced by the investment manager at their discretion in accordance with an investment mandate or Investment Policy Statement. The investment manager may be a discretionary fund manager or a financial adviser that is suitably licensed and registered as a CATII.
Model portfolios are efficient as an adviser who has investors with a similar investment objective, risk tolerance and time horizon will place them into the same model portfolio – as the underlying managed investment funds should achieve the outcome they all require. This allows for a centralised approach for the adviser and investment manager (should they be different parties).
This highlights the biggest benefit of a model portfolio – the ease at which the investment manager is able to implement investment decisions and changes to a model portfolio. One switch instruction would be sent to the administrator which would then reflect in the model portfolio – affecting the change for all investors invested in that model portfolio. This process ensures that all clients are treated fairly, a regulatory requirement under the principles of Treating Customers Fairly, as switches are done quickly and simultaneously for all investors within the same model portfolio who have similar investment objectives.
Other benefits of a model portfolio include enabling the investment manager to efficiently manage their investors assets by implementing changes quickly should market conditions change; diversification across asset classes, fund managers and investment strategies which reduces overall portfolio risk; consolidated reporting for investors – as investments are ‘wrapped’ into one model portfolio.