The goal has always been the same, to give all investors access to the professional services that have only been available to institutional investors and the very wealthy. Unit Trusts, then Master Trusts and Wrap Accounts made it possible for ordinary investors to gain many of these benefits yet some flaws remained.
The compromises that are inherent in a managed fund didn’t come from any attempt to limit or “de-tune” the products but simply reflected the realities of what was possible at the time they were designed.
Over the years more and more options and flexibility have been able to be added as the technology platforms developed and as the demand for more sophisticated solutions created the market for these products.
However, the underlying multi-layer structure where assets are pooled inside products that are owned by a trust, and portions of the trust are owned by the investors, has persisted.
The outcome is that the returns for your client are affected by the actions of other investors in the fund. For example, redemptions may cause the fund manager to sell assets to gain liquidity, triggering a CGT liability.
That liability is then shared among all investors holding units in the fund during that tax period, even those who didn’t hold units on the day the assets were sold. Also, a run of redemptions can force asset sales at sub-optimal prices. This reduces the overall value of the fund and lowers the unit price for all investors, including those who do not sell.
A Separately Managed Account takes the pooling step out of the process and passes ownership on to the investor. The compromises and penalties introduced by pooling are thereby avoided. This has become practical because the technology now exists to allow tracking of ownership from the underlying assets through the Model (or “product”) to each individual investor. Increasingly, new systems are also allowing individual instructions to be overlaid on the general model framework – for instance to prevent trading in certain specified stocks that might ordinarily be part of the Model Portfolio.