Investor acceptance of SMAs rising, S&P reports

Investors are taking up more separately managed accounts (SMAs) and the number of fund managers is growing to meet demand, according to Standard & Poor's (S&P) latest SMA Model Portfolio Ratings.

As part of its review, S&P upgraded the Dalton Nicol Reid Australian Equities High Conviction Portfolio to four stars, while the MCPM Core Australian Equity SMA was downgraded to three stars.

Ten of the SMAs, including Goldman Sachs JBWere Core Australian Equities and Hyperion Australian Growth Companies SMA, retained their rating.

Meanwhile, the Aviva Investors Blue Chip Top 20 and Ausbil Australian Concentrated Equity were withdrawn from S&P's ratings report.

As the SMA sector continued to grow, specifically when it came to funds inflow, S&P's fund services analyst Rodney Lay pointed to the variety of investment strategies and platform availability as a major factor in growth.

"The sector continues to be characterised by concentrated, low portfolio turnover portfolios with predominantly large to mid-market capitalisation stocks," Lay said.

"This is partly a reflection of investor preference, which in turn partly stems from the visibility of the constituent stocks of an SMA portfolio," he said.

Lay said larger market capitalisation stocks are looked on favourably by investors because they provide an elevated piece of mind.

"Investors have a preference for stocks they know and understand, and low turnover, as it conveys the perception to many investors that the investment manager has a greater degree of conviction in their stock picks," said Lay.

S&P believes that, overall, the management of model portfolios has improved - particularly when it comes to managers who may have previously been criticised by the ratings house.

The rate at which investment decisions were provided to SMA platforms has also improved, while the reconciliation between the performance of funds manager and the actual performance of their model portfolios on each platform has helped to paint a clearer picture for both ongoing and potential investors.

"As a consequence of these improvements, what we refer to as SMA-specific risks, tracking error and relative performance risk between the SMA product on the platforms and the managers' internal/unit trust equivalent has declined," said Lay.

S&P Fund Services believes SMAs are an efficient access mechanism to managers' investment strategies, providing stock, taxation, and cash flow visibility, as well as a more efficient taxation structure for investors.