Why SMAs are an alternative way to manage Australian share investments

Stuart Fechner explains why separately managed accounts offer an alternative way to manage Australian share investments.

Separately managed accounts (SMAs) have been in Australia for some time. Now, however, they are available through a platform and present a new way for retail investors to invest in Australian shares.

The following case study provides an example of how an adviser could work with a client to incorporate an SMA into their portfolio.

Case study

Jackie is 45-years-old and single. She works as an events manager for a multinational bank and sits in the highest tax bracket. She has $200,000 in a superannuation plan, of which $100,000 is in direct Australian shares, which she started in 1986.

Jackie is an adventurous investor who is willing to take risks and invest long-term.

The scenario

Tax is Jackie’s largest single expense, and she wants more information about how she can reduce her tax liabilities (while also ensuring that she is paying the correct amount).

She consults with her financial adviser for more information about the different types of investments (managed funds, shares or separately managed accounts) and if it is worthwhile using a portfolio administration service (or doing it on her own).

As Australian stock prices are now relatively low, Jackie’s financial adviser thinks it is a good time to invest and discusses which cost and tax effective investment options can help her build her retirement savings if she plans to retire at age 65.

The strategy

To help Jackie manage her tax, her adviser recommends she consider investing her $100,000 direct share holdings into an Australian shares SMA via a platform.

Jackie will continue to have a total of $200,000 in Australian shares within superannuation.

If any of the stocks Jackie is currently holding are ‘common’ to the SMA model into which she intends to invest, these common stocks (or a portion of them depending on the percentage indicated by the manager to hold) may be transferred into the SMA without triggering a capital gains tax (CGT) event.

Equally, if she intends to transfer to another SMA model at a later point in time, she will only pay tax on any gains made from the sale of ‘uncommon’ Australian shares and percentage differences between the two SMA models.

The Australian shares which are common to both SMA models and fall within the percentages for the relevant portfolio can be transferred without triggering a CGT event, hence avoiding a possible tax expense.

The financial result

Jackie’s financial adviser compares the management cost savings of an Australian shares SMA and an Australian shares managed fund over a long period.

Although, SMAs were not around in 1986, the adviser uses the historical returns achieved by the S&P/ASX 200 Accumulation Index since 1986 to demonstrate the impact on an investment of a difference in management costs over time.

Assumptions for graph below: the average Australian shares SMA management cost is 0.63 per cent per annum and an average Australian shares managed fund management cost is 0.92 per cent per annum.

Returns are based on historical returns achieved by the S&P/ASX 200 Accumulation Index and do not take into account any taxes or transaction costs, such as brokerage.

Before fees, the average return over the period for the S&P/ASX 200 Accumulation Index was 16.84 per cent per annum.

After fees, this return reduces to 15.18 per cent per annum for an average managed fund and 15.70 per cent per annum for an average SMA.

Tax and cost effectiveness

Jackie can save significantly on managements cost and avoid incurring inherited CGT that can exist and be incorporated within the unit price of managed funds.

And because she is using just one platform account, it means that she can keep track of all her investment income and the gains across her portfolio all on the one statement.

Professional management

Jackie’s SMA investment is managed by professionals like a managed fund, so she doesn’t have to watch the share market or monitor corporate actions for the shares she is invested in.

Superannuation

Some SMAs allow Jackie to hold her investment in superannuation.

Consolidation and transparency

Jackie’s online account and statement provides a single view of holdings. She can see the shares in her SMA consolidated into the same report as her other superannuation investments.

This helps her understand her investment and see a comprehensive, all-encompassing picture of her total portfolio.

At the end of the financial year she would also receive one single tax statement, making doing her tax much easier.

SMA benefits

This strategy may be ideal for clients looking for a potentially high growth, inexpensive investment and who are willing to tolerate some risk in order to achieve high returns over the long term.

Capital gains tax can be minimised because clients can transfer common Australian shares in and out of the SMA and they will not inherit CGT when buying into the SMA.

All your Australian shares are consolidated on your statement and in your online account, and the share offers (known as corporate actions) will be managed by the investment manager.

Stuart Fechner is distribution development manager, investment products at Aviva Australia.