Best of Breed
The 2006 Separately Managed Accounts Awards recognize excellence in products and managers
By Kathleen M. McBride
with Savita Iyer
From the April 2006 Issue of Investment Advisor Magazine
Separately managed accounts (SMAs) are a segment of money management that is growing ever more popular with advisors who work with high-net-worth individuals, large family offices, and endowments. Though they got their start in the 1950s, these aren't your parents' managed accounts. Wrap accounts at wirehouse brokerage firms and the popularity of fee-based compensation have contributed to SMAs' growth as investment vehicles. Fees have dropped, SMAs are often more tax-efficient than mutual funds, and some managers offer a high level of customization. Although minimum investment amounts are fairly steep, some clients who might never have considered an SMA before may soon want to invest in one.
But with some 5,000 SMA products in the marketplace it can be overwhelming to separate the wheat from the chaff. Recognizing that, Investment Advisor has for the second year in a row joined with Standard & Poor's and Prima Capital to recognize the best SMA products and managers as winners of the Separately Managed Accounts Awards. Prima Capital's Geoffrey Selzer, director of professional services, and Nathan Behan, senior analyst, sifted through mountains of SMA data in the S&P/Prima Capital SMA Evaluator (at www.primacapital.com) and came up with a short list of nominees from which the winners were selected. A committee that included Philip Edwards, managing director of Standard & Poor's Portfolio Advisor Services; Prima Capital President J. Gibson Watson III; IA Editor in Chief Jamie Green, and IA Staff Editor Kathleen McBride selected the award recipients.
To be considered, each portfolio had to be offered through a broad range of retail programs; have assets of at least $200 million under management; have at least an average score in four out of five categories in SMA Evaluator; and the lead manager must have been in place at least three years.
"When you look at the total universe of separately managed accounts out there, there are roughly 5,000 products. The issue becomes one of culling that universe down to a suitable sub-universe that is appropriate for high-net-worth individuals and families, and for the advisors and brokers that serve those types of clients," says J. Gibson Watson III, president of Prima Capital. He says there are between 700 and 800 SMAs in the "real world universe," that are viable candidates for HNW individuals and families that comprise the retail market for SMAs.
Overall assets in SMAs grew to $678.1 billion in 2005, up 17.7% from 2004, according to an MMI Manager Series Report by the Money Management Institute (MMI) in Washington and Financial Research Corporation (FRC) in Boston. FRC projects an average annual growth rate in SMA assets under management of 18%, reaching a total of $1.526 trillion in SMA assets by the end of 2010.
Expenses for SMAs generally are a bit lower than those for mutual funds. "For an actively managed equity mutual fund, you're looking at something in the neighborhood of about 141 basis points in terms of a management fee. What makes the comparison interesting for the investor is that that fee is embedded in the net asset value of the mutual fund," says Watson. In SMAs, managers report gross performance instead of net-of-fee performance, so it might seem logical to deduct the fee from the manager's gross performance. Typically, though, "what you'll find in the managed account world is that you're just looking at the management fee for the product," Watson points out. "The managers typically have a standard retail rate for investors who come in off the street, ranging anywhere from 75 basis points up to 1%, but for the sponsor programs and the distribution systems that they're willing to participate in, the sponsors will negotiate those management fees down to 50 basis points for equity and roughly 35 basis points for fixed income. The wirehouse brokerage firms have successfully negotiated those fees further south."
A new generation of managed accounts has started to become popular, variously called overlay accounts or model-based multi-manager accounts. These are similar to unified managed accounts, but in the overlay accounts, says Prima's Watson, "the manager will submit his portfolio models directly to the sponsor or to the overlay manager," electronically, and the sponsor, using overlay portfolio management software, will do the actual trading to "allow more efficient trading between the different sleeves of a portfolio." That yields a much more tax-efficient process, including better management of wash sales, and it's very cost-effective, according to Watson. The drawback is that not all SMA portfolio managers are comfortable with this technique because it means that "the manager is giving up his or her intellectual property to that sponsor or overlay portfolio manager. Watson says, "It gets down to how that manager generates alpha, and the nature of his business." On the plus side, says Watson, the managers outsource a lot of their operational, trading, and client service duties to the sponsor, allowing them to "focus on the portfolio management and investment research." Fees for these accounts can drop "in some cases to 30 to 35 basis points for equity." He says not all asset classes are available in the multimanager accounts—fixed income and emerging-markets equity are two that are not liquid enough to use these platforms—so the bigger selections would be in the most liquid classes, such as large-cap and some mid- and small-cap equity managers.
With greater availability, lower fees, and new platforms from sponsors where advisors can vet their own choices or select from already vetted SMA portfolios, overlay accounts, or model-based multimanager programs, it would seem that SMAs may be a more attractive option than ever before.
