Knowledge the key to SMAs

Ratings house van Eyk has pointed to the value of separately managed accounts (SMAs), but has warned that financial planners and their clients need to understand the flexibility and tax benefits could come at a cost if they are not used properly.

Pointing to recent survey data released by Investment Trends, van Eyk senior analyst Briana Lam said the type of investment strategy used in an SMA and how it was implemented determined the success of an individual portfolio.

She said SMAs were better suited to a concentrated portfolio of a smaller number of stocks to reduce turnover and to keep transactions costs and tax liability as low as possible.

“We think investors should be aware not all investment strategies are suited to an SMA-style product,” Lam said.

She said that while the ability to easily deviate from a model portfolio when investment opportunities arose was seen as a strength of SMAs, it could also be a weakness.

“Time lags and lack of monitoring of portfolios by fund managers can lead to returns in an SMA deviating from the manager’s model portfolio,” Lam said. “Differences can also arise from SMAs not having access to certain investments like initial public offerings, or some transactions taken by SMAs may be too small for a platform provider to process.”

Comparing boutique SMAs to those marketed by large fund managers, the van Eyk analysis said neither was clearly superior. Boutiques often have a better handle on the implementation issues surrounding the product, but larger providers often have better resources and greater access to sources of investment and market information, the analysis said.


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