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One way to look at separately managed accounts is as an alternative to managed funds. You are utilising the collective knowledge and intellectual property of investment professionals and experienced fund managers and have greater transparency and flexibility by investing in shares. SMAs are non-unitised managed funds.
Since SMAs were first introduced in the early 1990s the minimum investment in an SMA has steadily declined. You can invest in a separately managed account for as little as $5,000 across a single or multiple models within the SMA. A SMA model is like a selection of managed fund profiles however you own the underlying shares. For example the ASX top 20 is a model giving you a portfolio of the top 20 companies in Australia.
There are 3 major trends driving the growth of the managed accounts sector in Australia:
- Investors are increasingly demanding after tax returns instead of relative returns.
- Fee models in managed accounts made SMAs more accessible to the average investor
- Australian investors love the control they have when investing in shares directly.
Whilst it is clear from these trends what the reasons are behind the sector's growth, the downside is the difficulty in explaining how an SMA performs. As yet, there are no SMA equivalent of the managed funds performance surveys released by research firms on a monthly or yearly basis which would allow investors to compare which funds perform best and on what fees.
The Journey to SMAs
Today's SMA technology allows investors to access the portfolio models created by experienced and recognised fund managers outside of the traditional unitised collective investment structure.
The evolution to SMAs in Australia began with retail investments in unit trusts providing professional investment management. Master trusts were introduced as an umbrella to manage the administration burden of the growing number of unit trusts. Unfortunately the this was troublesome as the structure meant the investor will need to sell and encounter capital gains tax upon transfer from Master Trust to Master Trust. This led to Wrap platforms which has a pooled custody Investor Directed Portfolio Service (IDPS) legal structure. This meant clients can move funds within the wrap without triggering a CGT event however clients still encountered two custody fees.
The Separately Managed Account became the next evolution by delivering investment management and administration under a single custody structure. The SMA eliminated the unit trust structure and used only the intellectual property of the fund manager. SMA technology meant that investors can own the securities directly as selected by the fund manager.
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