Separately managed account
Encyclopedia
A separately managed account (SMA) is an individual managed investment account offered typically by a brokerage firm
through one of their broker
s or financial consultants and managed by independent investment management
firms (often called money managers for short) and have varying fee structures. With such a broad definition, many types of accounts might fit the definition of an SMA. There is no official designation for the SMA but there are common characteristics that are represented in all SMA programs. These characteristics include an open structure or flexible investment
security choices; multiple money managers; and a customized investment portfolio
formulated for a client's specific investment objectives or desired restrictions.
, in which the customer pays a fee to a money manager for its services managing the customer's investment. The important difference is that a mutual fund investor owns shares of a company that in turn owns other investments, whereas an SMA investor owns the invested assets directly in his own name.
A similar type of account or arrangement is termed a "separately managed account", "separate account", or "private account" when opened directly with a money management firm such as Janus Capital Group
, ITFX Capital Management Corporation, Ariel Investments, American Century Investments
, T. Rowe Price
. These are examples of investment management firms, which are not brokerage firms. The term "separate account" in this context should not be confused with separate account
of an insurance company.
SMAs were developed in the 1970s to accommodate accounts and clients who needed to meet specific objectives that did not fit within the constrictions of a mutual fund investment. It is the freedom of choice of professional managers, portfolio customization, objective investment advice for a set fee, diversification (or concentration should the client choose) tax efficiency and general flexibility that have made SMAs popular among informed investors.
Some people question if SMAs actually provide significant advantages in terms of risk/return over more typical portfolios. There is no clear answer, and without comprehensive data, any evidence is largely anecdotal.
The ownership structure of an SMA provides an investor some tax advantages over a similarly-invested mutual fund. After purchasing mutual fund shares, an investor will have a tax liability for any net capital gains in the mutual fund portfolio, even if the investments the fund sold for a gain were purchased before the investor owned the shares of the fund. This is known as an "unearned capital gain," and has a negative effect on the investor's return from his mutual fund investment. However, because assets in an SMA are owned by the investor directly, unearned capital gains are not possible. Further, an investor in an SMA typically has the ability to direct the investment manager to sell individual securities with the objective of raising capital gains or losses for tax planning purposes. This practice is known as "tax harvesting", and its objective is to attempt to equalize capital gains and losses across all of the investor's accounts for a given year in order to reduce capital gains taxes owed.
SMAs are popular with wealthier investor
s and their financial advisers as they are seen as exclusive, and offer investment options not available to those of more modest means. According to the State of the Financial Advisory Industry: 2008 report, SMAs are popular picks among advisers at national broker/dealers and wealth managers. Advisers at national broker/dealers and wealth managers (defined as any financial adviser with a client asset minimum of $2 million or above) made much more aggressive allocations to SMAs than the average. The national broker/dealers allocated 29 percent to separately managed accounts, with 17 percent to mutual funds; wealth managers allocated 18 percent to separately managed accounts and 28 percent to mutual funds.
The financial scandals and market declines that occurred in 2008 have served as a catalyst for hedge fund investors to migrate towards SMAs. As such, the SMA is evolving to accommodate expected investor demand into such structures. The unified managed account
is an example of an improvement on the SMA structure as it links multiple managers and strategies to a single investor-controlled account. The configuration of the unified managed account allows whatever blend of managers selected by the investor to be more capital and operationally efficient than had the same blend been structured within an SMA or within a fund structure.
The Wall Street Journal reported that separately managed accounts performed much better than mutual funds in 2008, a year when the global stock market lost US$21 trillion in value.
Morningstar, Inc.
found that SMAs outperformed mutual funds in 25 of 36 stock and bond market categories for not only 2008, but also 2006 and 2007. The Wall Street Journal cited top SMA performers including Robinson Value Management Ltd’s Market Opportunity Composite Strategy, and PTI Securities & Futures
LP’s Protected Index Program.
The Wall Street Journal added that SMAs work best for investors with at least $1 million or $2 million to spread among various SMA strategies. The story said that, “One reason SMAs may be outperforming mutual funds is that individual SMA strategies tend to have smaller amounts of assets than popular mutual funds, allowing them to trade more nimbly.”
Pensions & Investments, a national US investment trade magazine, identified several of the top performing SMAs for 2008.
Brokerage firm
A brokerage firm, or simply brokerage or broker in context, is a financial institution that facilitates the buying and selling of financial derivatives between a buyer and a seller...
through one of their broker
Broker
A broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
s or financial consultants and managed by independent investment management
Investment management
Investment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
firms (often called money managers for short) and have varying fee structures. With such a broad definition, many types of accounts might fit the definition of an SMA. There is no official designation for the SMA but there are common characteristics that are represented in all SMA programs. These characteristics include an open structure or flexible investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
security choices; multiple money managers; and a customized investment portfolio
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
formulated for a client's specific investment objectives or desired restrictions.
Description and history
The term "SMA" is used mostly in the U.S. brokerage industry for these types of arrangements whereby an account is managed by portfolio management resources within the firm, or more commonly, by an outside money management (investment advisory) firm along with an administrator. In this context, an SMA can be thought of as an investment vehicle similar to a mutual fundMutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
, in which the customer pays a fee to a money manager for its services managing the customer's investment. The important difference is that a mutual fund investor owns shares of a company that in turn owns other investments, whereas an SMA investor owns the invested assets directly in his own name.
A similar type of account or arrangement is termed a "separately managed account", "separate account", or "private account" when opened directly with a money management firm such as Janus Capital Group
Janus Capital Group
Janus Capital Group, Inc. is a publicly owned investment firm headquartered in Denver, Colorado. It provides growth and risk-managed investment strategies and manages equity, fixed income, money market, as well as balanced mutual funds....
, ITFX Capital Management Corporation, Ariel Investments, American Century Investments
American Century Investments
American Century Investments is a privately-controlled and independent investment management firm that has focused on delivering superior investment performance and building client relationships for more than 50 years. Its headquarters are located at 4500 Main in Kansas City, Missouri, near the...
, T. Rowe Price
T. Rowe Price
T. Rowe Price is a publicly owned Investment firm, headquartered in Baltimore, Maryland. It was founded in 1937 by Thomas Rowe Price, Jr.. The company offers mutual funds, subadvisory services, and separate account management for individuals, institutions, retirement plans, and financial...
. These are examples of investment management firms, which are not brokerage firms. The term "separate account" in this context should not be confused with separate account
Separate account
A separate account is a segregated accounting and reporting account held by an insurance company not in or "separate" from its general account. A separate account allows an investor to choose an investment category according to his individual risk tolerance, and desire for performance...
of an insurance company.
SMAs were developed in the 1970s to accommodate accounts and clients who needed to meet specific objectives that did not fit within the constrictions of a mutual fund investment. It is the freedom of choice of professional managers, portfolio customization, objective investment advice for a set fee, diversification (or concentration should the client choose) tax efficiency and general flexibility that have made SMAs popular among informed investors.
Some people question if SMAs actually provide significant advantages in terms of risk/return over more typical portfolios. There is no clear answer, and without comprehensive data, any evidence is largely anecdotal.
The ownership structure of an SMA provides an investor some tax advantages over a similarly-invested mutual fund. After purchasing mutual fund shares, an investor will have a tax liability for any net capital gains in the mutual fund portfolio, even if the investments the fund sold for a gain were purchased before the investor owned the shares of the fund. This is known as an "unearned capital gain," and has a negative effect on the investor's return from his mutual fund investment. However, because assets in an SMA are owned by the investor directly, unearned capital gains are not possible. Further, an investor in an SMA typically has the ability to direct the investment manager to sell individual securities with the objective of raising capital gains or losses for tax planning purposes. This practice is known as "tax harvesting", and its objective is to attempt to equalize capital gains and losses across all of the investor's accounts for a given year in order to reduce capital gains taxes owed.
SMAs are popular with wealthier investor
High net worth individual
A high-net-worth individual is a person with a high net worth. In the private banking business, these individuals typically are defined as having investable assets in excess of US$1 million. As explained below, the U.S...
s and their financial advisers as they are seen as exclusive, and offer investment options not available to those of more modest means. According to the State of the Financial Advisory Industry: 2008 report, SMAs are popular picks among advisers at national broker/dealers and wealth managers. Advisers at national broker/dealers and wealth managers (defined as any financial adviser with a client asset minimum of $2 million or above) made much more aggressive allocations to SMAs than the average. The national broker/dealers allocated 29 percent to separately managed accounts, with 17 percent to mutual funds; wealth managers allocated 18 percent to separately managed accounts and 28 percent to mutual funds.
The financial scandals and market declines that occurred in 2008 have served as a catalyst for hedge fund investors to migrate towards SMAs. As such, the SMA is evolving to accommodate expected investor demand into such structures. The unified managed account
Unified Managed Account
Unified managed accounts are managed investment accounts that have developed out of separate accounts. Where a separate account holds the securities associated with a single investment manager or style managed for a client, a unified managed account typically holds multiple separate accounts, as...
is an example of an improvement on the SMA structure as it links multiple managers and strategies to a single investor-controlled account. The configuration of the unified managed account allows whatever blend of managers selected by the investor to be more capital and operationally efficient than had the same blend been structured within an SMA or within a fund structure.
Performance
| Type | SMA | Mutual funds | + / - |
|---|---|
| Large cap | |
| 3.11 | |
| Large cap growth | |
| 2.46 | |
| Large cap value | |
| 2.44 | |
| Middle cap | |
| 2.55 | |
| Small cap | |
| 2.11 | |
| Foreign large | |
| 1.76 | |
| Intermediate bond | 0.73 |
| 5.8 |
The Wall Street Journal reported that separately managed accounts performed much better than mutual funds in 2008, a year when the global stock market lost US$21 trillion in value.
Morningstar, Inc.
Morningstar, Inc.
Morningstar, Inc. is an independent investment research company based in Chicago, Illinois, USA.-Businesses:Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for...
found that SMAs outperformed mutual funds in 25 of 36 stock and bond market categories for not only 2008, but also 2006 and 2007. The Wall Street Journal cited top SMA performers including Robinson Value Management Ltd’s Market Opportunity Composite Strategy, and PTI Securities & Futures
PTI Securities & Futures
PTI Securities & Futures is a money management, securities and discount brokerage firm with offices in Chicago, Illinois and Glendale, Arizona...
LP’s Protected Index Program.
The Wall Street Journal added that SMAs work best for investors with at least $1 million or $2 million to spread among various SMA strategies. The story said that, “One reason SMAs may be outperforming mutual funds is that individual SMA strategies tend to have smaller amounts of assets than popular mutual funds, allowing them to trade more nimbly.”
Pensions & Investments, a national US investment trade magazine, identified several of the top performing SMAs for 2008.