The managed portfolio service (MPS) market remains "shrouded in complexity" during a period of rapid expansion and diversification, according to a report from Defaqto.

The financial research firm said the report was the most comprehensive analysis of the MPS landscape ever produced, with all performance league tables being made available for the first time.

Using data from Defaqto’s Engage Insights analysis and research tool, the report found that the number of available MPS funds had surged as more providers entered the market.

There are now over 50 per cent more firms in the market than there were in 2016 and more than 120 companies now offer an increasing number of propositions and portfolios, with 2,029 platform portfolios currently available.

MPS portfolios were ‘likely’ to have overtaken multi-asset funds in total recommendations, although there was a “broad disparity” in returns and cost.

“In recent years, the MPS market has undergone remarkable growth – yet it remains shrouded in complexity and, all too often, unnecessary opacity,” said Defaqto head of investment and protection, Andy Parsons.

“Perhaps the biggest market trend is the growth of MPS as an outsourcing solution, with assets under management showing a clear upward trajectory.

“As explained in our report, we would suggest that the crossing point between multi-asset funds and MPS portfolios may now have been reached with MPS recommendations surpassing multi-asset. The question is: will this remain given the FCA’s investigation into MPS?”

The five cohorts of MPS portfolios - Defensive, Cautious, Balanced, Growth, and Adventurous – showed wide variations in performance, which the report said presented a key challenge for advisers, as the differences in returns within a single cohort could be substantial.

The report benchmarked cumulative and discrete returns across the cohorts based on historic risk returns and found that, for example, within the Balanced cohort, three-year cumulative returns ranged from 0.54 per cent to 27.98 per cent.

Meanwhile, Growth portfolios showed an even broader disparity over five years, from -6.44 per cent to 64.15 per cent.

It noted that these disparities exposed advisers to greater scrutiny, especially in today’s regulatory environment.

“Being forewarned is being forearmed,” Parsons stated. “With such clear gaps in performance, this benchmarking data gives advisers the confidence to challenge portfolio managers, justify selections, and demonstrate independent oversight.

“An adviser who has seen a -6 per cent return over five years should certainly be having a conversation.

“The takeaway is clear – performance benchmarking is not optional but essential. Advisers must access rigorous frameworks to support portfolio assessment, client outcomes, and compliance.”

The report, which broke down average total costs across active, passive, and ESG-managed portfolios within each cohort, found that while passive portfolios tended to remain the lowest cost, there were “surprising overlaps”.

In some cohorts, ESG portfolios were priced similarly to active, but may deliver efficiencies more in line with passive approaches, while some active portfolios were available at costs close to passives.

“The learning here is that you must investigate and not assume,” Parsons said. “Headline service fees alone can be misleading, and only total cost paints the full picture.

“We see wide bands between the highest and lowest costs which reinforces the need for advisers to look beyond labels and consider how style, structure, and underlying fund composition impact total expense.”

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