Investor acceptance of separately managed account (SMA) investments is continuing to grow and managers are improving their services on platforms that offer the products. Standard & Poor’s Fund Services today released its ratings of 12 SMA funds that are demonstrating this trend.
We upgraded the Dalton Nicol Reid Australian Equity High Conviction Portfolio to four stars and downgraded the MCPM Core Australian Equity SMA to three stars. At the same time, we affirmed our ratings on 10 funds.
Standard & Poor’s Fund Services analyst Rodney Lay said: “Since our inaugural SMA sector review in 2010, the SMA sector has continued to grow, specifically by funds inflow, number of managers, the variation of investment strategies, and platform availability”.
“The sector continues to be characterised by concentrated, low portfolio turnover portfolios with predominantly large- to mid-market capitalisation stocks. This is partly a reflection of investor preference, which in turn partly stems from the visibility of the constituent stocks of an SMA portfolio. Investors have a preference for stocks they know and understand (generally larger market capitalisation stocks) 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 Mr. Lay.
On the whole, the management of the model portfolios has improved as managers that we may have previously criticised have implemented improved processes. Specifically, the timeliness in which investment decisions are communicated to the various SMA platforms has improved. Similarly, the internal measurement of performance by the investment manager and the reconciliation with the actual performance of their model portfolios on each platform, so as to identify and address relative performance drift, has also improved.
“As a consequence of these improvements, what we refer to as SMA-specific risks, namely tracking error and relative performance risk between the SMA product on the platforms and the managers’ internal/unit trust equivalent has declined. We noted that the variation in performance between the SMA model portfolios and the unit trust version of the same investment strategy was generally negligible,” said Mr. Lay.
S&P Fund Services continues to view SMAs as an efficient access mechanism to managers’ investment strategies, providing stock, taxation, and cash flow visibility and providing a more efficient taxation structure for investors.
