Why does the W1M MPS use in-house funds?

Key takeaways

Purpose built structure: W1M’s in-house funds were created specifically to enable a building-block MPS that supports its direct investment philosophy, rather than adapting existing products to fit a model.

Efficiency without added fees: The structure allows portfolios to be managed and rebalanced consistently across platforms, without introducing a second layer of discretionary charges for clients.

Flexibility within a controlled framework: While core components are managed internally, the MPS remains open to third-party funds and specialist strategies where they add value, ensuring diversification and investment flexibility.

The use of in-house funds within Managed Portfolio Services has featured in the FCA's ongoing review of the MPS market and there has been subsequent speculation in the industry press. We believe the regulator is rightly focused on ensuring good client outcomes and identifying potential conflicts of interest, and this article clarifies the W1M approach to MPS construction.

Pioneering the building-block MPS

W1M was an early adopter of what is often described as a ‘building-block’ approach to MPS, moving away from the traditional MPS which is constructed using 20-30 third-party mutual funds. However, unlike some other providers using their own funds, the four W1M MPS constituent funds were not existing products that were later incorporated into an MPS. Instead, the funds were established specifically to support a different way of managing an MPS, one that reflects the investment philosophy we have applied to private client portfolios since 1986.

At the heart of that philosophy is direct investment. We believe direct ownership of underlying assets provides greater transparency, efficiency and control than a traditional fund-of-funds approach. However, delivering a directly invested portfolio across more than 25 third party platforms presents operational challenges. The use of in-house funds provides the infrastructure needed to make this possible at scale. Practically, this means we can hold around 50 stocks in our equity fund when many competitors will have hundreds.

Scale and efficiency

This structure enables efficient portfolio rebalancing, another area of focus for the FCA MPS review. Rather than coordinating changes across multiple platforms using substitute funds or share classes, or across thousands of individual client accounts where direct securities are held on platform, adjustments can be made within the underlying funds and reflected consistently across the MPS. The result is a simpler and more effective process that helps ensure portfolios remain aligned with their intended asset allocation.

Importance of total-cost to client

Importantly, the use of in-house funds does not result in clients paying a second layer of discretionary management fees. W1M does not charge a separate ‘DFM fee’ on top of the fund AMC, meaning there is no double charging. The four funds that make up the MPS all operate under a consistent charging structure designed to provide clarity and transparency for advisers and clients alike.

The flexibility of the structure is equally important. While the core building blocks are managed internally, our investment team retains the ability to allocate to third party funds whenever they believe it is in clients' best interests. This is not a closed architecture approach. For example, our Absolute Return Fund currently includes selected external strategies, such as the MontLake Dunn Fund, where these provide access to specialist expertise or diversification benefits.

A wider investment universe

Another advantage is the ability to access investments that may not be widely available on platforms. This includes certain investment trusts and our proprietary Protection Strategy, which comprises a range of derivative instruments designed to provide exposure to long volatility characteristics, acting akin to holding portfolio insurance against significant and rapid equity market declines. These types of holdings can offer additional diversification and potential return drivers that are often difficult to access within conventional MPS structures.

Transparency remains central to our approach

The use of W1M funds is clearly disclosed across our website, factsheets and marketing materials. Advisers and clients can therefore understand not only what is held within portfolios, but also why the structure has been adopted.

For W1M, the use of in-house funds is not about product manufacturing. It is about delivering an investment approach that combines direct asset exposure, operational efficiency and broad platform availability, while maintaining transparency and flexibility for advisers and their clients.

The use of W1M funds is central to how we deliver our investment philosophy. Rather than acting as an additional product layer, the funds provide an efficient way to implement a direct, high-conviction investment approach across adviser platforms. They allow us to manage portfolios consistently, access opportunities that may otherwise be unavailable and maintain flexibility to use third-party strategies where appropriate. Ultimately, the structure is designed with one objective in mind: delivering better investment outcomes for clients through a transparent and efficient investment process.

Glossary

Managed Portfolio Service (MPS): A centrally managed investment portfolio service where client portfolios are constructed and maintained according to a defined strategy, typically aligned to a specific risk profile.

Building-block approach: A method of portfolio construction using a small number of core components (funds or strategies), each representing a key asset class, rather than a large number of individual funds.

Direct investment: Investing directly in underlying assets such as equities or bond, rather than through multiple layers of funds, allowing for greater transparency, control and efficiency.

Fund-of-funds: A traditional investment structure where a portfolio is built using multiple third-party funds, often resulting in less transparency, additional layers of cost and reduced control compared to direct investment approaches.