As one marketing door shuts another opens. Indifferent performance from active managers and modern technology is providing advisers with an inducement to sell separate managed accounts to family offices and wealthy individuals
They are being used to bring order to bond and equity portfolios, pull together different approaches and achieve tax efficiencies. Analysts say liquidity concerns over equity and bond funds will drive more investors towards them, for fear of being left high and dry if investors dash for a pooled fund exit at once.
On the active side, their influence has declined compared to twenty years ago, but separate managed accounts can play an important role at family offices
Growth rates for separate accounts in the US has exceeded 10% a year, outpacing mutual funds, according to BNY Mellon, the custody bank. They now exceed $1 trillion in value, according to data providers. Morgan Stanley has described their growth as “explosive”.
Separate accounts resemble the discretionary accounts operated by brokers, which lost ground to mutual funds decades ago, due to their high cost and because thriving pooled funds offer ease of access. Modern separate accounts include allocations to securities, and relatively small exposure to pooled funds, managed by advisers, following discussions with clients.
Separate managed accounts are typically accessed by individuals with more than $1 million to invest who want to feel in control of their own strategies. Adviser TD Ameritrade sets its minimum at $60,000. Morgan Stanley says separate accounts can be as small as $25,000. Fee scales vary, but family offices are reluctant to pay more than 100 to 125 basis points for traditional strategies.
To keep costs down, advisers like to use model portfolios offering different risk exposures, which are more easily regulated than a series of individual accounts. According to a recent research report by data provider Broadridge: “Model portfolios allow them to build a business that can be scaled, while providing more attention to clients.”
As well as smaller separate accounts, modern technology can permit a variety of risk exposures to be offered from head office, or via third-party providers, including asset managers. Unified Managed Accounts are used to pull together a string of investment strategies.
Proactive marketing is likely to have just as much influence over sales as client demand. A marketer at one of the UK’s largest asset managers said: “If pooled funds are going out of fashion, why should managers let advisers steal their lunch?”
Separate accounts can offer transparency to clients, but they also run the risk of never knowing how well their funds have been performing against their peers. Data providers are currently working on the problem.
Family offices are taking advantage of managed accounts in several ways, according to adviser Steve Martiros, managing partner of Martiros Strategies. “On the active side, their influence has declined compared to twenty years ago, but separate managed accounts can play an important role at family offices.”
One route relates to the way in which they can be structured to harvest tax losses, which is not so straightforward with pooled funds.
Family offices also use a separate account structure to adjust their indexed exposures. Martiros says: “It is generally easier to build a portfolio from the bottom up, than trying to customise a cap-weighted fund. Technology-driven solutions are making it easier to build highly-customised indexed accounts.”
They can ask their advisers to top and tail passive portfolios of securities to suit their ethical, or investment, stance. Some may be leery of the dominance of large technology companies in the index and restrict their exposures. They may want an equal weighting for each index constitute, rather than a cap-weighted approach. They might want exposure to value or growth factors, or a sustainable investment approach.
US adviser Parametric says: “While smaller accounts may be adequately served by a simple ETF solution, larger accounts seeking greater tax efficiency and personalization may find themselves a better match with an SMA.”
Family offices often want to match their outgoings with their income, through cash flow matching. Again, separate accounts can help. Martiros says: “Bonds, unlike stocks, have a maturity date. But bond funds do not provide one. This is less relevant for highly liquid strategies but more important for niche strategies.”
Family offices can also use separate accounts to access niche managers, through a segregated approach, where the securities are managed separately.
Managed accounts proved popular in the hedge fund sector, immediately after the credit crisis of 2008, which increased the risk of implosion for specific funds. However, the managers who are prepared to offer separate accounts are not likely to be particularly popular with investors. Separate accounts will often include pooled funds, for this reason.
Sensing an opportunity as a result of the popularity of its cheap passive funds, Vanguard has cut its fees for five active off-the-peg funds in Europe run by sub-advisers like Baillie Gifford and Wellington Management from 60 bps to 48 bps. These would be less than half the price of separate accounts, although advisers argue that investors will pay for a personal touch.
Others are less sure. Charlotte Thorne, a partner at UK-based multi-family office Capital Generation Partners, says: “We are running our own tailored asset allocation for clients on an individual basis, so we would rather populate our own asset allocation with investments we have sourced.”
She added, however, that slightly smaller clients using advisory firms might want to use them to protect themselves against fund failures.