Getting what you paid for
With separately managed accounts growing in popularity, some fund managers are building their own versions that are more unit trust than SMA.
There are some subtle but meaningful differences between SMAs and managed funds, according to Andrew Stanley, head of Australian equities, Ralton Asset Management.
"The key difference is that in an SMA environment, you're managing the shares in the client's own name, whereas in the fund, it's on a pooled basis, and that actually gives rise to a number of differences in the way you think about them and the outcome for the end client," he says.
Some of the benefits include increased transparency around underlying holdings--a particularly popular attribute for self-managed super fund (SMSF) investors.
SMAs are considerably more flexible than managed funds, largely because they don't have a pooled unit trust structure. This enables the portfolio manager to increase the overall SMA balance without reweighting.
Stanley believes some fund managers are responding to the growing demand for SMAs by simply re-badging their unit trust structure.
"But the question is: do they own the type of stocks that are appropriate for SMAs, are they liquid enough? You've got to make sure [the underlying stocks] are liquid enough ... that the portfolio parameters are structured to operate in the interests of the client, and that you putting money in isn't going to ramp the stock or the fund manager," he says.
He believes a fund manager running an SMA in this way can create a lot more turnover just to keep the stock weightings the same, "or you're going to get a tracking error between the performance of the unit trust and the SMA, and how much of a discrepancy do you get in the performance between the two?"
An influx of administration is another problematic side-effect this can create.
"With a unit trust, you just get your annual distribution statement, a one-line item. With an SMA, the client gets as transaction history of everything that's happened," Stanley says.
In one case he's aware of, a quantitative manager was turning over the SMA portfolio multiple times per year, generating numerous transaction statements, "which was clearly inappropriate ... by its nature, your turnover [in an SMA] needs to be lower," Stanley says.
What can you do about it?
Stanley suggests this is something investors need to be aware of when selecting an SMA manager, to ensure they find an SMA specialist who isn't simply a traditional fund manager trying to shoehorn their unit trust into a different structure.
Otherwise, he believes you could miss out on some of the main benefits of the SMA structure. These include greater transparency and tax benefits of owning assets in your own name instead of through a unit trust.
There are also other options that utilise similar structures, known as unified managed accounts (UMA). Morningstar Investment Management builds investment portfolios using a combination of managed accounts, exchange-traded funds, and direct shares.
A new digital investment platform, Morningstar Next, makes use of this multi-asset structure to offer three portfolios regarded as cautious, balanced, and growth in its strategy.
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Glenn Freeman is a senior editor at Morningstar.
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