Unlocking the Benefits of Unitising: Insights from Margetts

Following our first blog post on Tax Year End in March, we continue our series with an exploration of unitisation. Over the past twelve months, we have seen a significant increase in enquiries for unitised funds and this blog aims to explore some of the reasons why this has become an increasingly attractive option for many model portfolio service operators.

The Financial Conduct Authority (FCA) and the UK Government have been driving changes and growth within the sector. The UK is currently the largest asset management sector in Europe and the second largest globally, with £14.3 trillion in assets managed by over 2,500 investment services firms¹. These statistics highlight the need for efficiency within investment structures.

What is Unitisation?
Unitisation is the process of converting individual investment portfolios, typically held on a platform, into a single or small number of managed funds such as UCITS or NURS. Investors own units in the managed funds, sharing the underlying assets collectively and this provides potential benefits  such as economies of scale, improved transaction execution, and simplified administration.

UK regulated funds must be established and operated by an Authorised Corporate Director (ACD) which must appoint a depositary, custodian, auditor and also provide administration/fund accountancy services. The ACD is accountable to investors and the regulator. 

Independent, or host, ACDs like MGTS provide asset managers and intermediaries with a service that allows investments to be aligned and tailored to the individual needs of a specific group of investors within a purpose-built investment product. Hosted funds are sponsored by the company that has helped to design the fund and provides distribution to investors. The Sponsor typically has rights over the funds that allow it to work with the ACD, usually including the contractual right to change the ACD.

The most common approaches to unitisation are to create several ‘building block’ funds which combine to create desired asset allocations or ‘multi-asset’ funds, which provide asset allocation internally. Both “building block” approaches provide benefits to managing a portfolio, whether the strategy is active, passive or blended. These approaches allow advisers to match investors to a consistent and robust solution that aligns with the investor’s risk profile, stage of life and financial circumstances. 

Why are asset managers and distributors moving towards unitisation?
1) In our experience, Sponsors talk to us about unitisation because: Consolidation in the intermediary market and host ACD market has provided greater economies of scale to create funds in a cost-effective way

2) Growing challenges and requirements of managing individual portfolios in a way that is consistent and measurable  

3) Difficulties in measuring and reporting value for individual investors, where there may be greater inconsistencies between actual performance and the various model portfolios services (MPS) often used to manage investments

4) Inconsistency of available investments across different platforms

5) Increasing operational cost of managing MPS through time if there is a requirement to increase the number of models, when underlying investments close or investors face significant Capital Gains Tax (CGT) liabilities

6) The risk of changes to CGT and the potential impact on the ability to manage asset allocation and investment selection. Within funds the underlying investment can change without triggering CGT, which is only impacted when the investor sells the managed fund

7) Out of market risk from investment switches and other execution factors

8) The ability to negotiate fees with underlying fund providers or Investment Managers

Regulated funds provide opportunities to address the above factors whilst operating within rigorous regulatory requirements. Bespoke reporting may help to improve transparency and provide more detailed information about the management of investments. By simplifying the administrative burden, more time is available for effective governance and oversight. 

Investment Management Benefits  
We have spoken with several Investment Managers to understand the key benefits of a unitised proposition. Beyond operational efficiencies, a unitised structure can also offer portfolio management advantages that enhance investor service. 

• Access: Fund structures can open the door to a wider range of assets, for example some exchange traded securities not available on retail platforms.
• Economies of Scale: For fund of fund structures, the economies of unitisation can provide access to restricted share classes, only open to institutional investors or have high investment minimums.
• Pooled assets: Pooling assets in one vehicle also provides opportunities to further diversify selection, where it may not always be cost effective to hold multiple lines of stock for the individual.
• Delegation: Where the Sponsor does not have investment management permissions or the required resources to manage a fund, the ACD can delegate the management to another Firm, or may be able to provide management internally.  
• Sub-delegation: In some solutions, one or more sub-delegated managers are appointed to manage all or part of the portfolio. This allows Investment Managers to be switched if performance is weak or better opportunities are expected with an alternative manager.
• Reporting: Daily pricing provides a fully transparent environment to monitor actual investment performance and volatility in real-time.
• Speed: Portfolio Managers can act swiftly as markets change and can match trades without requiring settlement, reducing or eliminating ‘out of the market’ time. The use of an operational overdraft at Fund level also aids this. 

Is unitisation for everyone?
Unitisation will not be the solution for everyone and requires careful consideration. The following are some of the matters worth consideration:

• The ACD will establish and operate the fund. If the funds are part of a centralised investment proposition, then this partnership is critical to the long-term success of the funds, with the service and reputation of the ACD reflecting on your business.
• Funds require significant and long-term scale to achieve the potential benefits and provide value. Getting the design right at the start is therefore critical and different ACD models will provide different levels of support.
• The investment objectives and policy of funds is required to be clear, specific and concise. Changes to the fund’s design or investment strategy have strict protocols for notifying investors. This is in the investor’s interests however the protocols designed to protect investors can also feel restrictive to some.
• The ACD will be required to conduct initial and ongoing due diligence on the Sponsor and Investment Manager’s firm, which takes some time and investment, although most firms will already be subject to similar oversight.

Summary 
There are many ways to offer investment services to investors, with varying benefits to each option. We hope to have provided an insight into what the key benefits of a unitised structure could offer. Whilst moving to a unitised model offers a range of benefits, Sponsors often seek clarity on how this change will be implemented. As an ACD, we work in close partnership with Sponsors throughout the process. As co-manufacturers of the proposed fund structures, we work with Sponsors to shape the product design, listening carefully to the Sponsor’s vision and investor needs. We can then advise on a strategy that ensures the product is suitable for its target market in terms of investment objectives, strategy, and risk profile. We also guide Sponsors through the FCA application process from start to finish, transforming initial concepts into well-developed proposals via a thorough fact-finding stage before submitting them for regulatory approval.

If you would like to explore unitising, or find out more about the potential benefits, contact our Sponsor Relations team at Enquiries@margetts.com.

Stay tuned for more insights on fund management and industry trends from Margetts!

1 - Portfolio letter: Asset Management & Alternatives - Supervisory Strategy