SMA’s (Separately Managed Accounts) are the latest step in a long evolutionary process that began with the first unit trusts over twenty years ago. The goal is to provide individual investors with access to the benefits of portfolio diversification, professional management and administrative ease that are often only available to larger entities (or the very wealthiest individuals).

The defining feature of a Separately Managed Account is that the underlying investment assets are held personally by the investor (either legally or beneficially). In contrast, the underlying assets in a managed fund are owned by the fund while the investor owns units in the fund. Personal ownership has a number of advantages such as the prevention of inherited capital gains but often comes at the penalty of higher administrative costs. The ability to use technology to cost effectively manage administration has been the key driver to bring these more sophisticated solutions to investors.

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.

Since the client owns the underlying investments, they can be moved in and out of a Managed Account on an in-specie basis at any time. As a result the shares are completely portable and when using this portability there is typically no CGT event. In most (if not all) cases fees for transferring out are limited to administration charges and buy/sell spreads are non-existent.

Tax planning

This is one of the most discussed and most often touted benefits of Managed Accounts. The assets are owned by the client and the client (or their advisers) can make decisions as to which purchase lots are allocated against sell transactions to increase or decrease the CGT liability in the current tax period.

When purchasing shares in a Managed Account you also do not inherit a capital gains tax liability which is a common problem with unit trust style Managed Funds.

Available investments

All Managed Accounts on offer are most heavily invested in Australian equities. Some include fixed interest securities and international equities are also available.

Transparency

There is steady consumer demand for ever greater disclosure and an instinctive mistrust of ‘secret’ or hidden processes. With a Managed Account, all transactions are reported to the client. The range of securities in which their funds are invested, the buys and sells made by the manager and the returns on each item are all recorded on the account statement. All fees and charges are shown as individual items.

While this is too much information for many clients it does allow their adviser to be fully informed.

Access to portfolio manager

Direct access to our professional portfolio managers and regular updates.

Full administration and reporting

No administration hassles and reporting is available.

Ownership

You are always the beneficial owner of the underlying investments.

Cost efficiency – Inherent diversification

As Investment Partners is able to negotiate brokerage on a scale basis for clients, brokerage costs can be significantly lower than would be the case with a traditional stock broker or even a discount broker.

*Fee For Service basis, quotes available on request subject to market conditions.