Not all SMAs are created equal
The Australian investment landscape has quietly undergone a transformation in the past five to 10 years with the emergence of Separately Managed Accounts (SMAs), otherwise known as Managed Portfolios, now being introduced to clients across the financial advice industry.
Industry data has recently highlighted that FUM in SMAs has grown to $132bn and almost 50% of advisers now use managed accounts.
Toby Potter, chair of IMAP, said: “The growth rate in managed accounts is accelerating to the point where it is approaching 40% per year”.
Much of this demand has been led by strong industry thematics including regulation and the need to position around client 'best interest'. SMAs help advisers by providing a one-stop solution that is transparent, but importantly is managed by a team of investment professionals.
Above all else, financial advisers can recommend a sophisticated solution for their clients without needing to issue cumbersome advice documents every time an asset is changed. Technological advancements driven by platforms, particularly newer entrants to that field, have also driven growth.
Clients with a moderate to high asset balance may benefit via greater portfolio transparency, potential tax advantages and beneficial ownership of assets. Advisers can bring about considerable efficiency gains by incorporating SMAs into their business. They can also improve portfolio design by appointing professional investment firms to help construct portfolios.
Clearly, there are many benefits for advisers and their clients in adopting an SMA. At the same time, there are important considerations for financial advisers and clients when they consider investing in a managed account. Some of these questions are yet to surface or be debated to any great degree.
So, let’s unpack the key considerations an adviser should undertake when looking into the SMA structure.
Is the client actually better off?
Private market assets, derivatives for portfolio construction and currency hedges are important tools available to investment professionals to manage risk and opportunity. These assets are often excluded from SMAs, limiting the ability of investment managers and advisers to deliver to the investment mandate.
Minimum parcel sizes can also create an issue for small shareholdings – meaning that some assets may be excluded from a model portfolio for clients with lower asset balances. Lastly, with the more recent push for lower fees across the industry, many providers are moving heavily into the ETF or listed asset space. This can bring about greater portfolio volatility.
A cursory look at the returns to 30 June for many mainstream managed accounts highlighted that many were susceptible to the simultaneous fall in bonds and shares. the level of diversification present in these portfolios wasn’t sufficient to withstand the tough market conditions.
Is there an opportunity to improve outcomes in the SMA space?
Large industry funds have made a sustained push towards private assets. According to APRA, MySuper funds allocated around 20% of assets to private equity, unlisted property and unlisted infrastructure (at 31 December, 2021).
Financial advisers will increasingly need to compete with the funds by providing their clients with investment solutions that can manage portfolio volatility and deliver a smoother return profile.
One of the limitations for advisers is in platform technology and investment accessibility. Most platforms limit the eligible investments in the SMA to those which are available for investment on the platform menu, meaning that a range of offshore or potentially illiquid investments are precluded. Investing is a global game and spans asset classes which often fall outside of the mainstream.
As clients see the benefits of these types of assets and the role they can play in portfolio diversification, they will seek investments which can cater for these needs.
As the SMA market develops and matures, we expect portfolio design will need to evolve to better maximise opportunities. As a result, standard approaches to portfolio construction in mainstream asset classes are likely to be challenged as we move into a higher volatile environment such as what we are currently witnessing.
Managers who can distinguish their offer and provide clients with the options that already exist in a managed fund form may have the best opportunity to succeed in what has become a competitive landscape.
There have been some recent moves by platform providers to open opportunities to invest in asset such as private markets, however these generally exist in IDPS form and are not available to superannuation or pension menus. Sector portfolios such as alternatives or direct shares are also now being assessed by advisers, as the portfolio construction is disaggregated or multiple SMA managers are considered.
Conclusion: The SMA space is expected to mature
The benefits of an SMA are clear, however, to best meet the needs of investors looking for sophisticated portfolio that may withstand market risk, the space needs to evolve and mature over the next few years. Platforms and managers who can work with advisers to deliver consistent portfolio outcomes for clients will be best placed to prosper over the next decade.
David Dix is head of client investment solutions at Atrium Investment Management.
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Just so I understand this correctly - private equity offers less volatility? Not simply because the assets are valued far less frequently??