The UK managed portfolios sector is experiencing a slowdown in new launches alongside a growing shift towards passive investments, according to Morningstar’s UK Managed Portfolio Landscape report for 2024.

As of the end of 2023, managed portfolios accounted for 14% of the total UK wealth management market, signalling the sector’s maturity after a period of rapid growth.

The report has revealed a significant decline in the use of active management. Since the 2022 study, the proportion of portfolios labelled “active” has dropped from 61% to 48%. Additionally, the number of truly active portfolios is likely even lower, with many still incorporating passive elements through index funds.

One of the report’s key findings is the dominance of passive funds, especially in broad equity and bond market index funds. Less than 15% of managed portfolios completely avoid the use of index funds, indicating a strong trend towards low-cost, passive investments. The report also highlights that multi-asset solutions, mainly constructed using mutual funds, remain the primary structure of these portfolios, with ETFs making up only around 15% of underlying holdings. ESG-focused ETFs are particularly popular where ETFs are used.

While the UK managed portfolios sector experienced a boom between 2018 and 2022, with 55% of portfolios launched during that time, the pace of new launches has since moderated, suggesting a shift towards market consolidation. Morningstar’s data indicates that the sector may be entering a more mature phase.

In terms of performance, passive portfolios have outshone active ones, particularly in the equity-heavy GBP allocation 80%-plus equity category, where passive strategies have delivered stronger returns. However, in other categories, there is a more balanced representation of active, passive, and blended styles among the top performers.

Over the five years to July 2024, more conservative managed portfolios have outperformed their Morningstar category indexes in absolute returns, while equity-heavy categories have lagged. According to the analysts, this underperformance reflects the challenges faced by active equity managers amid shifts between value and growth styles, with mega-cap stocks driving much of the market gains.

The most-held active funds span various Morningstar categories and are generally well-regarded, boasting strong Morningstar Medalist Ratings. According to the analysts, several established sustainable and ethical funds continue to rank among the top 10 most-held investments, indicating a focus on quality and responsible investing.

“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.” – Tom Mills, senior manager research analyst, Morningstar.