Small Investments into Model Portfolios

Why can small investments into models cause some purchases to fail?

Small investments into model portfolios can cause purchases in some constituent funds to fail, due to the interaction between:

• The percentage weighting of the fund within the model

• The NAV of the fund at the valuation point

• The number of decimal places the fund trades to

Managed funds typically trade to 2 - 4 decimal places. Fewer decimal places means a higher minimum investment for a successful trade.

Funds with a low model allocation, a high NAV, and 2dp trading are most likely to cause failures on small investments.

Worked example

A fund trading to 4dp can accept purchases as small as 0.0001 units; one trading to 2dp requires a minimum of 0.01 units.

If fund X has a NAV of £500 and trades to 4dp, the minimum successful purchase is £0.05 (0.0001 units). Trading to 2dp, the minimum rises to £5 (0.01 units).

If fund X represents 2% of the model, the minimum total model investment is £250. The example below shows what happens if only £240 is invested:

£4.80 is insufficient to purchase 0.01 units in fund X, so the cash is returned to the account.

Am I likely to see this in some models more than others?

Yes - models with a relatively small allocation to either fixed income or equity are more susceptible, as individual fund allocations will be lower.

For example, a 10% or 90% equity portfolio will have small allocations to equity or bond funds respectively. If those funds have high NAVs and trade to 2dp, purchase failures are more likely.

How might this impact clients?

Failed fund purchases create investment exposure that diverges from the DFM’s intended allocation, potentially causing cash drag, reduced performance, risk profile misalignment, and increased inflation exposure - effects that compound over time, particularly with regular investment.

Why don’t I see this on other platforms?

Trades fail on other platforms for the same reasons - the maths and mechanics are the same. It may be less visible where platforms mandate cash holdings within a model, or don’t separate cash from model holdings the way Timeline does with its Model-Flex account structure.