In an investment universe that has long been dominated by managed funds, followed by master trusts and wrap accounts, managed accounts have barely got a look in. Managed accounts - in the form of individually managed accounts (IMA), and of separately managed accounts (SMAs) - have been available in Australia for a long time, but the superior convenience of the managed fund model has invariably pushed them to the back of the room.
The combination of enabling technology, and increasing demand from self managed super fund (SMSF) trustees and their advisers, as they discover the advantages of investing directly in shares while receiving professional management and administration, may be the impetus for change.
Praemium director Arthur Naoumidis says that managed accounts are the perfect application for SMSFs. "It's a natural shoe-in for SMSFs. It gives the investor the richness of the investment experience they would get investing in direct shares, but gives them professional funds management as well." Praemium currently administers around 15,000 SMAs, around a quarter of which, Naoumidis says, are owned by SMSFs. That is a proportion likely to grow too, as more of the 360,000 SMSFs now in existence come to recognise the value of professional management, with regards to investing in direct shares.
Shaw Stockbroking head of portfolio and financial services Adam Dawes says around half of the brokers' IMAs are owned by SMSFs. "SMSFs are definitely the growth area," says Dawes. "SMSF trustees are coming to recognise that they are the perfect low cost, low tax solution."
Fat Prophets chief operating officer Richard Fabricius says many of the clients of Fat Prophets' SMAs started investing for themselves. "[They] found they are just too busy to make day-to-day investment decisions. Or, they set them up and they get stage fright and lose the confidence to make the actual investments."
Dawes says many SMSF trustees simply do not have the expertise to manage their share investments properly. They do not know when to buy and when to sell, how to pick entry points, or how to pick and cull stocks dispassionately.
Under-diversification is a real problem for many SMSF trustees, says Ralton Asset Management, an issuer of SMAs, managing director Damian Holland (who is also a director of the Institute of Managed Accounts Providers - IMAP). "Typically they have just a handful of shares." Current market volatility is showing many trustees the importance of diversification and professional expertise, he says, adding that managed accounts offer the perfect marriage of diversification with transparency and control.
According BlackRock director Cormac Heffernan, while SMSF trustees might have a preference for investing in direct shares, many are starting to see there is a distinction between having control over their investments, and making every single investment decision for themselves. "They might want to be able to see what is going on in their portfolios. but they do not necessarily want to be involved in the day-to-day trading of their stocks. Deciding for instance, whether they should buy Westpac, or another banking stock, or switch to a mining stock." Traditionally, at this point trustees, or their advisers, cave in and decide to invest their equities allocation in managed funds or a master trust, even if doing so runs counter to the point of setting up an SMSF in the first place.
Managed accounts provide a way for trustees to gain professional investment management, while still retaining a close connection with their investments, he says. "It gives investors the richness of the investment experience," says Naoumidis. "It allows them to have professional funds management, but they still have a direct equity portfolio and they can go in and tweak it to have some element of customisation. After all, if SMSF investors put their money in a unitised master trust they might as well put it in a corporate super fund."
Heffernan says there is a good psychological match between managed accounts and the type of person who sets up SMSFs. "These are people who have gone to a fair bit of effort to set up their fund and they want to have control over their super and be in touch with it. Managed accounts give them a way to retain that control."
One of the biggest advantages of managed accounts, and their biggest selling point, is the direct connection with the tax consequences of any holdings within the account. Because they are direct owners of the shares, rather than merely unit holders, as in a managed fund, managed account owners directly receive any dividends, along with associated franking credits. Also, members are not exposed to the tax consequences of realised capital gains within distribution payouts - that they may not have even benefited from, as is a frequent complaint with managed funds.
"One of the benefits of a managed account is the ability to manage capital gains during the life of the SMSF," Linear Financial director Colin Peterson says. "You can offset losses against gains over the course of the financial year." That ability to manage gains against losses over the life of the fund shows its ultimate benefit when the member dies, he points out. "If you die with a managed fund or master trust, the capital gains can be enormous because you have had no control over them over the life of the fund. because when you die the fund is taxed back at accumulation stage."
For many trustees, the biggest benefit of a managed account is the ability to see exactly what shares a trustee holds, and their value on a day-to-day basis. Unitholders of a managed fund are usually informed only of the top 10 shareholdings in the fund, and changes to these shareholdings are reported no more than once or twice a year. Administration platform systems associated with managed accounts now allow trustees and their advisers to see through to their underlying investments at any time.
Broadly, managed accounts come in two styles - the individually managed account (IMA) and the separately managed account (SMA). An IMA is a service, generally offered by a broker or a private wealth adviser, which allows trustees to build and develop a share portfolio from scratch with this one-to-one assistance. IMAs are generally suited to high net-worth clients of perhaps a million dollars or more. The trustee is the ultimate owner of the shares.
SMAs on the other hand, are operated more along the lines of a managed fund, with money invested in a model portfolio, assembled and administered by the fund manager. A particular strategy is followed, such as growth or income. However, depending on the SMA, individual investors may have some control over the underlying investments - avoiding certain shares because of ethical reasons for instance, or selling particular stocks for tax effectiveness. The trustee has beneficial ownership of the shares. Because an investor's assets are pooled with others investing in the same model portfolio, SMAs can be offered at much lower entry levels than IMAs, with $20,000 the minimum for many. Management fees for both IMAs and SMAs tend to be lower than for comparable managed funds, in part because, as Naoumidis points out, SMAs incorporate one less layer of costs than corresponding managed funds. Due to managed accounts providers handling the brokerage for multiple accounts, the brokerage is able to be netted across all trades - which can often reduce the brokerage to zero.
For those setting up their first managed account, they are easy to apply for, and to make contributions and withdrawals, offering same day liquidity. Existing shareholdings can be transferred into the managed account as in species transfers, with no capital gains consequences. Because shares are held directly, they can also be moved as individual shareholdings, if the trustee decides to transfer to another managed accounts provider.
For financial advisers, managed accounts represent a means by which they can be put back into the picture of their clients' share portfolios, Heffernan points out. "The problem with SMSFs for financial advisers is that they are not generally licensed to advise on direct shares. That has created a mismatch, where advisers have not been able to help them with their investment strategy, leaving clients to their own devices in that area."
In this regard, SMAs tend to be easier to organise than IMAs for financial advisers. Essentially, a managed investment product, SMAs are issued with a public disclosure statement (PDS) - meaning any adviser who is licensed to sell managed funds can direct their clients into SMAs. However, Dawes points out that many advisers refer their clients to Shaw's IMAs as a service, rather than a product. "For someone with $1 million they may say: Why should I put my money into a model portfolio? I want more control than that."
In either case, advisers are still very much in the picture, says Peterson. "The adviser still does what they have always done, in terms of asset allocation - depending on their clients' objectives and risk profile. They can also leave the managed accounts operator to carry out all the portfolio management and the tax reporting. We give advisers the opportunity to give advice, and we take care of the administration and the paperwork."
Says Dawes: "the financial adviser is still the overall guide, who looks after the portfolio in terms of lifespan, risk profile and asset allocation. In fact, the financial adviser is crucial to making the managed account work, because they are the distribution network."
The role for SMA operators now is to canvas advisers, to educate them as to how SMAs can work for their SMSF clients. Heffernan says BlackRock are directly targeting advisers, telling them they are missing out on a large part of their market if they can't advise on direct equities. But it is still a difficult task when there is a lack of research, ratings and monitoring of performance. Given that an SMA is no less of a managed investment than a managed fund; relying squarely on the expertise and commitment of the managers of model portfolios, the sector requires as much monitoring as do managed funds.
While there are individual research reports carried out on individual SMA operators, by researchers such as Zentih and Lonsec in Australia, as yet, there are no mass-scale performance tables of peers. Morningstar's US SMA database contains data for more than 1000 investment managers and allows peer group analysis, as well as comparisons to mutual funds and ETFs. Here in Australia, the research house is partnering up with IMAP to start rating the industry. But, Holland acknowledges the project is still in its infancy.
Fabricius says it is a chicken and egg situation where once demand is big enough, research houses will turn their attention to the industry. "We are hoping to see it evolve to the point where there are independent people providing ratings and motoring the performance. But it is difficult to build that demand until advisers can see the research and ratings come out."
Heffernan says BlackRock is relying on dealer groups approving the products without research reports. "But we imagine that down the line there will be ratings in the same way as managed funds, based on demand."
Naoumidis acknowledges that managed accounts are still very much in the embryonic stage. However, he does expect to see huge growth from here on, with SMSFs the trigger for what he expects will be a huge leap in demand. "SMSFs are certainly the low-hanging fruit."
When SMSF clients inevitably discover the wrap account is not only expensive in terms of what they are getting, but that there is a product offers more, they will be demanding why their advisers are not using it, says Peterson. "We believe the space we are in now will be where everyone will be in five years time."
