The UK managed portfolio sector is slowing in the number of new launches and experiencing steady growth in the use of passive investments, driving a downward trend for costs, Morningstar has found.

Its UK Managed Portfolio Landscape for 2024 report showed that, at the end of 2023, the UK managed portfolio industry made up 14 per cent of the total UK wealth management market.

While the earliest offerings in the Morningstar database date from 2004, 55 per cent of managed portfolios were incepted between 2018 and 2022 during a period of “fast expansion”.

Since 2022, the rate of new launches has slowed, which Morningstar said indicated the sector may be maturing.

Morningstar noted that managed portfolio clients now have a wide range of offerings, with typical provider lineups including active, passive, blended, and sustainable investment styles.

Providers in its database each offer an average of 15-20 portfolios, with this breadth and replication suggesting there is a crowded landscape for UK managed portfolio providers to stand out from the competition.

The presence of active funds was found to be decreasing, with the proportion of portfolios labelled as ‘active’ falling from 61 per cent in 2022 to 48 per cent in 2024.

Passive funds continued to dominate the list of most frequently held mutual funds, with broad equity and bond market index funds widely used in particular.

Currently, less than 15 per cent of managed portfolios in Morningstar’s database completely abstain from index funds.

The growing number of passive and blended managed portfolios, and increased use of index funds, reflected the commercial pressure on costs, the firm noted.

The median combined costs of active, passive, and blended managed portfolios were all now slightly lower than in 2022, primarily driven by slow but steady reductions in underlying holding costs.

Managed portfolios were “overwhelmingly” multi-asset solutions, primarily using mutual funds as their building blocks, while listed underlying investments were not as common.

Exchange-traded funds (ETF) made up around 15 per cent of underlying holdings by number and, where they are used, ETFs with socially responsible investment or ESG policies were among the most held.

Morningstar found that, when judging the top 10 portfolios in each category by total returns, managed portfolios using mainly passive holdings had experienced greater success than active peers in the most equity-heavy GBP allocation 80 per cent plus equity category.

In the other Morningstar model categories, it found that active, blended, and passive styles were more evenly represented across the top 10 performers.

Over the five years to the end of July 2024, measured by the performance of the median portfolio in each category, more conservative categories have produced higher absolute returns than their Morningstar category indexes, although more equity-heavy categories have lagged their bogies.

Morningstar stated this reflected a challenging period or active equity managers, when market leadership has seen abrupt swings between value and growth styles, and mega-caps have mainly carried markets higher.

Commenting on the report, Morningstar senior manager research analyst, Tom Mills, said: “Nowadays, managed portfolio clients have a wide choice of offerings. Typical provider lineups include active, passive, blended, and sustainable investment styles, catering to a range of client risk levels.

“Such breadth and replication make the UK managed portfolio space a crowded landscape, creating difficulty for providers to stand out from competitors.

“The growing proportion of passive and blended managed portfolios, and the increased use of passive holdings in portfolios, also reflects commercial pressure on costs.”

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