Hargreaves Lansdown (HL) is set to employ segregated mandates within its £10bn multi-manager range for the first time, with Columbia Threadneedle Investments and Jupiter Asset Management the initial groups to be signed up on this basis and others added over time.
On 5 November, HL will appoint Columbia Threadneedle Investments to run a portion of its £3.3bn Multi-Manager Income & Growth Trust.
This mandate will replace direct fund exposure to Richard Colwell's £777m Threadneedle UK Equity Alpha Income fund over time, which had a 10.5% weighting in the Income & Growth fund as at 31 August 2018.
Then on 7 January, HL will appoint Jupiter Asset Management to run sub-advised mandates for its MM Income & Growth Trust and £311m MM Equity & Bond Trust.
Again over time, these will replace direct fund exposure to Ben Whitmore's £2.5bn Jupiter Income Trust, which was the joint top holding in the MM Income & Growth fund at 16.4% at the end of August. The fund was a 5.4% weighting in the MM Equity & Bond fund at the same date.
The group said the move towards sub-advised mandates "gives us the option to access fund managers we hold in high regard without needing to invest in their funds".
It will also give HL access to institutional managers who do not have a retail fund and allow them to create bespoke strategies with managers.
These new deals should also reduce charges for the multi-manager funds over time, with HL expecting fund manager costs to decline by around 10bps-15bps following the move, although it added it did not expect savings to be seen "for at least a year". Ongoing charges figures on the HL MM funds are currently 1.3% on Income & Growth and 1.38% on Equity & Bond.
The changes are being made following approval by 88% of HL client voters, and the firm said the decision was taken now as its 10-strong multi-manager range was at a size where it was "viable" to make the shift, at currently £10bn in AUM.
Sub-advised mandates will initially be included in two multi-manager funds, but HL anticipates these arrangements could be extended across the range in due course, with UK funds being replaced first.
'More efficient portfolios'
Lee Gardhouse, chief investment officer at Hargreaves Lansdown, said: "When we started looking into this new way of accessing managers our focus was entirely on reducing costs, but we quickly realised we could also work with those managers to create bespoke and more efficient portfolios - importantly giving us the potential to deliver better longer-term performance.
"For example, I have long felt fund managers' absolute worst habit is holding too much cash - even as little as 5% over time can act as a drag on performance. But with this new structure we can work with the managers to create portfolios for us where they run with little or no cash at all.
"I believe the future looks bright with this new flexibility but the core of what we are going to do will be unchanged."
Since the implementation of the Retail Distribution Review in 2013, the investment outsourcing trend has concentrated flows into the hands of a smaller number of gatekeepers, who are using their increased buying power to negotiate sub-advisory mandates with asset managers.
Providers say segregated mandates are now making up a growing portion of their retail fund flows.
In February this year, research and consultancy firm NextWealth noted the AUM of wealth managers' current segregated mandates is equivalent to 12% of retail AUM at £86bn, although it predicts this will jump to about £180bn over the next two years.
High-profile shifts this year have included wealth manager Brewin Dolphin announcing it is set to reduce costs on its Managed Portfolio Service by £3m a year, as it moves the bulk of its investments with third-party managers from retail funds to segregated mandates.
In addition, Fidelity recently completed a move to segregated mandates on its £946m multi-asset Open range.
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