Even more surprisingly, some platforms do not offer income units for all of their portfolios. In this situation, separate portfolios must be created and managed for each contract. This adds to the administrative burden and increases the likelihood of mistakes being made.
The problem is made more acute by the model-based nature of platform-based managed portfolios, as mistakes tend to be repeated across a large number of clients.
A better approach would be to introduce consistency into the investment strategy. By bringing together more relevant CMAs, with an optimisation process designed to maximise yield stability and an execution process sensitive to the different ways platforms operate, it is possible to create income portfolios worthy of the name.
Clearly, this more coherent approach requires a significant investment in time and resources, but it is an investment worth making to help secure the financial wellbeing of investors.
Dan Kemp is co-head of investment consulting and portfolio management, Europe, Middle East and Africa, at Morningstar
Dan Kemp from Morningstar explains:
“Another element of the CMAs that is often missed by investors is the difference between the headline yield of the asset class and the actual income received by investors. While this mismatch is present in all asset classes, it is most obvious in real property investment where we estimate the average yield is 50 per cent lower than the headline yield of the IPD benchmark.
“Each of these differences will affect the optimisation process used by asset allocators to create the strategic portfolios, with the result being that the performance of the portfolio populated by income-focused funds will be different from that indicated by the SAA.”
