Learn about SMAs and IMAs and their benefits

Will SMAs become as popular as managed funds in the future?

Separately managed accounts (SMAs) are professionally constructed and managed portfolios of securities in which the portfolio manager has full discretion over the investment decisions.  In some ways they are similar to a managed fund except that instead of the investor holding units in the fund, SMA investors are the beneficial owners of the underlying securities in the portfolio, which means that they benefit from greater transparency and tax efficiency.

SMA portfolios typically follow the model portfolio chosen by the portfolio manager.  When a new client invests in the SMA, the portfolio manager buys them the same stocks as in the model portfolio.  Clients may also be able to transfer in their existing portfolio of shares and cash into the SMA, in which case the portfolio manager will only trade the necessary securities to align the client’s existing portfolio with the model portfolio.  In the past SMAs were usually only available to high net worth individuals, but technological developments have allowed for scalability and a reduction in costs, making them more available to the average investor with around $30,000 or more.

An individually-managed account (IMA) is similar to an SMA except that the IMA is tailored to suit the needs of a specific client. For example, IMAs allow for the client to exclude certain stocks that may be included in the model portfolio for ethical reasons or to avoid purchasing shares that may still be included in the manager’s model portfolio but where most of the gains have already been achieved and therefore the potential upside is more limited. As each IMA is different, they are more labour intensive and typically require a minimum investment of $500,000 or more.

As a result of the beneficial ownership of the securities, SMAs and IMAs have a number of benefits over pooled investment vehicles. Because investors directly receive dividends, franking credits and capital gains on each security in the account, there is a greater ability to control the tax planning of capital gains tax (CGT). For example, if an investor wants to change SMA portfolio managers, then he or she would only need to trade securities where there is a difference between the old and new model, potentially reducing the amount of realised capital gain/losses.

Similarly, if the change in a model portfolio causes capital gains to be crystallised, the investor may be able to offset the gain by also selling a security that has unrealised capital losses. Compared to an investor in a managed fund, a unit holder would have no ability to minimise the impact of capital gains. In addition, unlike owning units in a managed fund, share transfers into or out of a portfolio can be done without incurring CGT or transaction costs. Transparency is also an additional benefit as all the underlying securities are visible to investors and fees are easily broken down between management and administration charges.

In Australia, there are a limited number of providers and the majority are restricted to Australian shares. Model portfolios are often relatively concentrated portfolios comprising no more than about 20-25 securities with the majority of SMA portfolios focussed on larger Australian companies, but over time SMAs will offer exposure to international shares and fixed income securities.

Despite all its benefits, SMAs constitute a small portion of the investment landscape. However, thanks to technology improvements and increases in the number of SMA portfolios on offer many believe that in the not too distant future they will become as popular as managed funds.
 

 

Important notice

This article is prepared for information purposes only. It does not purport to contain all matters relevant to any particular investment or financial instrument, or to a general investment approach.

This article contains general advice only. It does not take into account your investment objectives, financial situation or particular needs.  You should consider whether this advice is suitable for you and your personal circumstances.

JBWere Ltd (‘JBWere’) and its related entities distributing this article and each of their respective directors, officers and agents (‘JBWere Group’) believe that the information contained in this article is correct and that any estimates, opinions, conclusions or recommendations contained in this article are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of any estimates, opinions, conclusions, recommendations (which may change without notice) or other information contained in this article and, to the maximum extent permitted by law, the JBWere Group disclaims all liability and responsibility for any direct or indirect loss or damage which may be suffered by any recipient through relying on anything contained in or omitted from this article.  JBWere Group may provide investment recommendations, market commentary or trading strategies to clients reflecting opinions that are contrary to the opinions expressed in this article, or that are inconsistent with the recommendations or views expressed in this article.

This article may contain information based on JBWere’s understanding of taxation and other laws. JBWere does not hold itself out as providing professional taxation advice. You should consult with your professional taxation advisor before acting on the information or data contained in this article or contact a financial advisor if you require further assistance.