Continued growth of SMA platforms in coming years: Lonsec

Lonsec has undertaken new research into Australia’s  separately managed account (SMA) platforms in recognition of the increasingly important role SMAs play in offering investors heightened transparency and greater control over their investments.

In response to strong interest from its clients, Lonsec conducted what it believes to be the first comprehensive research into SMA platforms in Australia.

SMAs are normally non-discretionary in nature, in that the operator of the platform executes changes to model portfolios, but does not make the investment decision. By contrast, Individual Managed Accounts (IMAs) are normally run on a discretionary basis. Providers must be licenced as Managed Discretionary Account (MDA) operators.

Lonsec assigned ‘Approved’ ratings to each of the five SMA platforms it reviewed. The five SMA operators collectively account for over $2 billion in assets under management and over half of the total SMA market (defined as funds tracking model portfolios).

According to Michael Elsworth, Lonsec’s General Manager – Specialised Research, the SMA market falls into two broad categories: the large banks surveyed tend to view their SMA platforms as adjuncts to their wrap administration platforms, generally offering a narrower range of model portfolios. Meanwhile, specialist financial services groups, with strong orientation towards technology, are competing with the established players, in part by offering a more extensive range of model portfolios.

Both larger banks and specialist financial services companies committed to growing their SMA businesses over the next two years.

“In essence, usage of SMAs will likely grow thanks to both greater demand from advisory groups and other investors and to new and competitive solutions that are delivered by banks and other companies that are strategically committed to SMAs,” Mr Elsworth said.

Lonsec took a two-pronged approach to the research, reviewing investment managers and their model portfolios while also looking at the administrative services provided by the platforms and the underlying technology.

In assessing the investment managers, Lonsec looked at the communication between the managers and the operators of the SMA platforms. Lonsec also considered the suitability of the model portfolios for use in SMAs.

A key finding was that the SMA operators are not all alike in the ways in which they communicate with model portfolio managers: nor are they alike in the ways in which they communicate with advisers and investors.

“This new research defines the language and key concepts underlying SMAs in Australia and we expect the research to grow and become a sector in its own right over coming years,” Mr Elsworth concluded.

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In its report, S&P noted that the ‘ “STRONG” rating reflects the benefits of a strong product and service offering, timely execution of portfolio managers’ investment decisions, cost effective management of trades, and a technology platform that is convenient for advisers and portfolio managers.’

The review went on to say that, ‘having now established an extensive product and service offering, advisers have the ability to use the platform as their main or sole investment implementation application. The service is convenient and simple to use for advisers and portfolio managers. Additionally, the service provides direct data feeds (EPI 4.0) into the largest adviser software applications.’

Commenting on this review, Chief Executive Officer of Investorfirst, Mr Darren Pettiona, said “It is pleasing to receive independent confirmation of the HUB24 SMA platform. We have a strong and stable team, with each member playing an equally important role in our success.”

“S&P’s review process is extremely thorough and this rating not only recognises HUB24’s development achievements but also our deep understanding of SMA specific risks and commitment to very high implementation standards – all critical components of efficient, transparent and effective portfolio delivery to investors.”

The key strengths stated in the report include:

• Cost effective management of trades, both in relation to brokerage rates (5.5 bps) and the minimisation of market impact price risks.
• Investment decisions are implemented on a same-day or next-day basis, greatly mitigating a number of SMA-specific risks.
• The platform’s online tools are convenient for both advisers and portfolio managers.
• The SMA product range is large, with 25 investment managers and 58 SMA model portfolios. The platform also provides access to a broader asset-class menu, including managed funds, exchange traded funds (ETFs) and direct equities.
• Internally developed IT systems that, among other things, enable the manager to respond to client requests for additional functionality.
• The management team has a strong pedigree and a proven track record in the development of financial planning software.
• Model portfolio managers are empowered to easily manage and maintain their portfolios through an online “work bench”.
• Reporting of performance differentials between a model portfolio and unit trust version (where one exists) provides advisers valuable transparency regarding the efficiency of the model portfolio.
• As a part of the review process S&P noted that it believed that ‘the risk that the service will be discontinued at some future point is extremely remote based on the manager’s financial position, the strategic importance of HUB24 to the growth prospects of the listed entity that owns HUB24, and solid client prospects based on the strength of the service offering.’

A full copy of the S&P Report is available on the Investorfirst Ltd website http://investorfirst.com.au/archives/1235

Additionally more information about S&P’s SMA ratings approach can be found in the explanatory guides: ‘Guide to S&P SMA Model Portfolio Ratings’ and ‘Guide to S&P SMA Model Platform Ratings’ on the Standard & Poor’s website http://www2.standardandpoors.com/portal/site/sp/en/au/page.article/2,4,2,0,1148442711865.html

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