It seems like only yesterday that the portfolio in your average managed account was just a plain vanilla, equities-based collection of assets.
Not any more. These days the portfolios being offered by managed account providers come in a rainbow of flavours and are increasingly complex multi-asset products incorporating a sophisticated range of portfolio management tools.
As Toby Potter, chair of the Institute of Managed Account Professionals (IMAP) explains, managed portfolios are no longer just about equities.
“One of the key drivers in the growing adoption of the managed accounts approach is its use for whole-of-portfolio construction … rather than at the individual asset class level,” he says.
Russell Brinckley, national manager product development at BT Financial Group, agrees there is a significant shift occurring.
“Traditionally, managed accounts were about Australian equities and property, followed by increasing interest in listed securities. But now we are seeing a significant tilt to diversified portfolios – especially active portfolios.
Advisers are no longer looking just for a better way to hold a client’s direct equity allocation, he says. “At BT, the split is now about a 50:50 mix between diversified portfolios and direct equities portfolios.”
Potter believes the move towards diversified portfolios is a natural evolution. “The change is a reflection of the maturity and broader dispersion of the use of managed accounts from earlier adopters to more mass-market usage.”
Multi-asset boosts managed portfolios
Lukasz de Pourbaix, chief investment officer at Lonsec Investment Solutions, agrees the market is evolving, with greater interest in more complex, multi-asset portfolios being the overarching portfolio construction trend at the moment.
“Separately managed accounts (SMAs) version one was centred on equities, but it is now moving to multi-asset portfolios across different risk profiles.”
Interest in the various portfolio approaches is split between adviser groups, each of which is seeking something different from the managed account structure, he explains.
“The first group is advisers who have a history of using direct equities. They are generally looking for a multi-asset structure that just uses listed solutions, such as exchange traded funds (ETFs) for both a passive and active approach. In the ETF world, active fund managers are increasingly appearing with product offerings that they can use.”
The second adviser grouping is those who have always used model portfolios and are looking for better, more efficient vehicles. “In effect a multi-asset portfolio managed fund, as this increases efficiency in their business,” de Pourbaix notes.
The final group is licensees looking to build a managed account structure which is vehicle agnostic. “They want ETFs for market exposure and active funds for asset classes where they can’t easily get exposure, such as long/short and alternative assets. The hybrid approach is quite common.”
From equities to listed securities
Paul Saliba, head of equities and portfolio construction at IOOF Research, has also seen the evolution in managed portfolios.
“Managed accounts started in broking type advice communities with listed equities as an answer to the question of how to do it better and cheaper and change allocations when the client is away on holidays etc. Managed accounts answered a lot of questions for clients and advisers,” he explains.
“The interest in diversified portfolios is a natural development, as advisers have found managed accounts with direct equities in a properly diversified portfolio only solved part of the problem they face."
According to Potter, the original focus on direct equities has morphed as more listed assets have appeared in the local market.
“[There is] increased availability of listed securities and investment products from the Australian Stock Exchange (ASX).”
Saliba believes the growing availability of listed assets is creating new opportunities for advisers interested in constructing client portfolios.
“There is an increasing desire for direct investments; including fixed interest, equities and global equities. This is often being driven by independent financial planners and practices."
For BT’s client base, local shares remain important, says Brinckley.
“Within the listed securities, interest remains largely in core Australian equities portfolios, but there is also a large focus on income return with franking credits. What is slowly coming through, however, is a demand for lower cost portfolios through ETF-based portfolios."
International equities also have growing appeal.
“There is definitely interest in direct securities like international equities, but it is harder to do international equities directly. If they are available from managed account providers, advisers are certainly interested,” Saliba says.
Diversified portfolios win hearts
Despite the ready acceptance of portfolios constructed around listed securities, Brinckley believes diversified portfolios are taking a growing slice of the pie. “Diversified portfolios are more popular and the focus is on more actively managed portfolios. We have our own diversified BT portfolio and also some from BlackRock and Zenith.”
When it comes to the multi-asset portfolios receiving most adviser attention, Saliba believes a growing favourite is those offering good diversification and a tactical approach to asset allocation.
“Managed accounts allow asset allocation changes to be made more easily and allow advisers to be more proactive in their asset allocation. They can use investment managers to professionally manage the portfolio and take advantage of market changes as they happen,” he notes.
“Some groups are even offering portfolios with a dynamic asset allocation approach.”
All this is music to the ears of investment managers keen to boost funds under management. The growing dollar flows into managed accounts are seeing more and more investment houses showing interest in supplying professionally managed portfolios to the burgeoning market.
“We are seeing increased fund manager interest and there are already 100 managers offering managed account strategies. Many have gone straight into managed accounts with various portfolio strategies, rather than taking the managed fund route,” Potter explains.
“Major financial institutions like BlackRock and Vanguard are developing strategies specific to managed accounts.”
Brinckley agrees: “Investment managers have been aware of managed accounts for a long time. Those investment managers who are not doing managed accounts yet are closely monitoring it and if not, are likely to do so soon.”
Increasing portfolio sophistication and tools
Institutional interest and growing fund flows are seeing managed portfolio offerings become much more cutting edge.
Potter predicts managed portfolios will become even more sophisticated in the future.
“We are seeing increasingly nuanced investment vehicles and seeing increased niche investment products incorporated into portfolios,” he says.
“We expect to see overlays available in managed accounts within the next year or so. These will be overlays like currency, tax or retirement income – strategies which were only ever available at the institutional level.”
Sophisticated portfolio tools will also make an appearance.
“This will allow things like breaking out the hedging decision from the investment decision, rather than the current situation where you have to select a managed fund that is either hedged or not hedged,” Potter says.
New portfolio construction tools will also be available, according to de Pourbaix.
“We are seeing increased activity in the area of smart beta or quality factor investing – such as low leverage – via ETFs. This is an area where we are seeing some interest as a way to hypothetically achieve similar exposure in a more cost-efficient way.”
Potter argues these developments are of real benefit to clients: “Managed portfolios are a way of adopting a more active, engaged portfolio invested in a range of assets. In the past, things around portfolio management were often not done, or not done in a timely fashion, but with a managed account structure that problem is overcome.”
Managed portfolios also allow advisers to tailor their portfolio management services to different client segments.
“For example, with some high service clients they may not be used, but other clients who are lower touch may be where a managed portfolio will be used,” explains de Pourbaix.
“Or a managed account may be used as a core across the entire client base and the adviser adds their own touch in some investment areas, such as a particular fund they have used in the past.”
Fees also drive interest
Pressure on fees at the practice level is also making the managed portfolio approach appealing.
“Two key factors have changed; one is Future of Financial Advice (FoFA) and the other fundamental change is the increased cost of running an advice business. Managed accounts are seen as a way to retain margin and service clients in a fee-for-advice world where advisers need to streamline their business,” de Pourbaix explains.
This fee tension is seeing advisers and dealer groups lean in on investment costs to protect margins, in turn propelling interest in cheaper ETF-focussed portfolios and other cost-saving investment strategies.
“Investment fee negotiation is no longer just at the institutional level, it is also available through some managed accounts, with the fee rebated to the client. Some investment managers are rebating by tiered asset level, some not at all, and some in other ways,” he notes.
Saliba believes professionally constructed and managed portfolios can help practices cope in a tough business environment.
“I suspect advisers are having to discuss client fees and are looking for ways to reduce them. Lower cost vehicles – like managed accounts – can be a way to achieve that. There is definitely a low-cost driver with vehicles like ETFs, together with interest in lower cost solutions like core plus satellite.”
There are, however, inherent risks with this, he warns. “It’s important to note that chasing cost can be detrimental to the client outcome. Direct assets can be a risk, as it can lead to a portfolio being more concentrated and also higher risk than if done in other ways.”
Efficiency key to interest
Managed portfolios are also appealing as a way advisers can improve practice efficiency by outsourcing key portfolio construction and management tasks.
“Traditionally advisers used the portfolio tools on their platform for portfolio management, but with managed accounts there is increased efficiency and a decreased lag in execution when it comes to making portfolio changes,” Brinckley explains.
They also help with clients interested in the detail of portfolio management, he notes. “Many clients are after transparency and information about how their portfolio is being managed and have a greater interest in timely execution.”
Efficient implementation is important, de Pourbaix says.
“When you have a model portfolio, the investment managers are doing all the switching and you have all the assets in one place.”
Leaving it to full-time investment managers is not only more efficient, but also provides useful risk protection.
“There is always a risk for advisers who are doing it themselves and who don’t have the full investment management capabilities supporting them, such as risk management tools and investment management committees,” explains Saliba.
Efficiency and cost pressures will continue to boost the popularity of managed portfolios.
“The opportunity is to provide professionally managed portfolios to clients where you can get better pricing – such as rebates for actively managed portfolios – allowing you to build cheaper solutions without having to use other product solutions like ETF portfolios. It also allow advisers to concentrate on the client management aspect of the business, rather than the investment management aspect,” he says.
Fresh regulatory attention
The growing significance of managed portfolios is seeing regulators pay more attention.
“I expect to see increased scrutiny of the governance around model managers and these types of structures as interest and assets grow,” de Pourbaix notes.
Another development likely to fuel interest in externally managed portfolios will come in the second half of 2018.
Advisers currently using limited managed discretionary account (LMDA) arrangements to manage clients’ portfolios will no longer be able to take advantage of ASIC’s 2004 ‘no action’ letter.
This change will see the advisers currently using this approach seeking new investment management and portfolio administration options.
“From 1 October, advisers using ‘no action’ letters must be doing something different, as ASIC has withdrawn them,” Potter explains.
Advisers can either apply to ASIC for a licenced authorisation to provide MDA services to retail investors, or partner with an experienced, specialist MDA operator. A potential third option is to run client portfolios via a SMA structure.
Brinckley believes this is an important development. “This is leading to advisers reassessing how to provide advice. As a result, BT has developed appropriate SMA solutions and tailored portfolios.”
Although he expects to see more interest in managed portfolios in the run up to 1 October, in the longer term Brinckley believes improved efficiency will be the key driver for practices embracing managed portfolios.
“Efficiency for licensees and advisers is a key point. Managed portfolios allow advisers to spend more time on activities outside investment management.”