IMAs grow as an alternative to funds

BRW, September 2008

Picture a halfway house between running your own share portfolio and owning a managed fund. Like a fund, you have an investment expert picking the stocks for you to build a portfolio. But like going it alone, you own the shares, rather than just a unit in a fund or trust.

This is the individually managed account (IMA), or separately managed account (SMA). And they are – slowly – growing in popularity in Australia as an alternative to managed funds.

IMAs and SMAs are quite different. An IMA is a fully customised account that is yours and yours alone. All the shares are in your name, and the portfolio can be adjusted according to your preferences: to exclude ethically dubious stocks like those in tobacco and alcohol, for example; or set up with your own tax position in mind, perhaps by focusing on companies that pay a high franked dividend.

“For example, an executive in a major mining company might want an Australian equities portfolio,” explains Paul Heath, head of private wealth at Goldman Sachs JB Were. “He might say: I’ve already got all the resources exposure I need [perhaps through stock options as part of his salary package], so I want a portfolio of Australian equities ex-resources.” An IMA can provide that.

In an SMA, you still own the underlying shares, but your account isn’t customised. You invest according to a particular portfolio that is the same for anyone else who invests, just like a fund.

So what’s the advantage? One is that this ownership of the shares in your own name carries some significant benefits. When you buy into a managed fund, it often has uncrystallised capital gains in it; at some point in the future, if that holding is sold, you’ll be lumbered with a tax hit dating back to a time before you ever owned the fund.

Another is portability. If you decide you’re not happy with your manager, you can simply get another one without having to sell or move the shares anywhere. Contrast that with managed funds, where, if you want to move, you have to sell out, which may create a tax situation that doesn’t suit your timing. Also, transparency is typically much higher in an IMA or SMA than in a managed fund: particularly in the more customised IMAs, you can see at any point exactly what you hold, what transactions have taken place, and when.

In IMAs, the tax advantages become bigger still. “Tax has got to be the number one benefit,” says James Embleton, division director at Macquarie Private Wealth. “If you’re a high marginal tax payer, then earning a large portion of your returns through capital appreciation is a more efficient form of return than straight income. But if you’re in a pension or super fund, receiving your return in the form of a fully franked dividend is more efficient.” IMAs can alter their structure, and their behaviour towards corporate actions like share buybacks, accordingly.

The thing is, these advantages have been known for years, but the structures have never really taken off in Australia, unlike in the United States where they are part of the investment mainstream. Arthur Naomidis, CEO of Premium, which provides the administration services for an SMA offered by BlackRock Investment Management, estimates there are between A$1-2 billion deployed in SMA structures in Australia (Blackrock has over $300 million of it), which in Australia’s trillion-dollar managed investment environment is nothing. IMAs, as private wealth products, are more difficult to track but would amount to several billion more; Macquarie Bank manages $1.4 billion between its IMA and SMA products, with 90% of it in the former category.

Why the slow growth? Opinions vary. Mark Thomas at van Eyk, which has about $50 million under management in an SMA product, says: “The key to it has been that markets have been so strong, so people haven’t been focused on the after-tax efficiencies.” Heath agrees: “If you look at the experience overseas, the catalyst has been when there has been a significant negative move in investment markets,” he says. “The experience for an Australian managing their own portfolio has been very good for the last decade.”

Thomas also suggests that the way the Australian wealth management industry is set up, with the dominance of wrap/mastertrust investment platforms and financial planners, has not helped. “The biggest cost saving from the move to investment platforms went to financial planners who no longer had to do the back office work. And the major platforms have not really pushed the IMA space.”

While inertia no doubt is part of the reason, investors may also be wondering about the expertise of the people doing the managing. In SMAs, it’s usually quite clear, as investors choose model portfolios provided by the manager itself (such as Goldman Sachs or BlackRock) or other fund managers who have provided their portfolios for a fee (examples include Ausbil Dexia and Perennial Investment Management). In IMAs, though, which often come through small boutiques, the expertise may be less clear. “That’s the problem with a lot of corner shop type IMA operators,” says Charles Leyland of Leyland Asset Management, which runs about $220 million under management between its IMA and stockbroking services. “You see accounting firms who think they can be stock pickers, small companies who don’t have access to the resources or expertise.” For IMAs, another barrier is the entry level, which for some providers is as high as $1 million; it’s much lower for SMAs, often set at $50,000 of assets.

Nevertheless, there are signs of greater acceptance. The Blackrock/Praemium product now has 143 financial planning groups subscribing to it, among them big names like Citi and Count, which suggests the distribution challenge is being addressed. On the provider side, names as big as BT, Macquarie, AMP and ING have all either launched an SMA product or are believed to be developing one. Fees vary considerably, combining an administration fee (starting at 0.6% for Blackrock, for example) with another fee for the portfolio that goes to the fund manager, which again using Blackrock as an example varies from zero (for an index fund) to 1.5%. But SMAs are generally at least competitive with managed funds, while IMAs can cost a little more (2% at Leyland, for example).

Naomidis thinks the biggest prize for these providers will be when the self-managed super fund community starts taking notice. “That’s one big market which has no vested interest [towards investment platforms],” he says. “That’s the holy grail: there’s $300 billion there for taking.” And others believe it’s just a question of reason. “I don’t think I’ve ever sat down in front of an advisor that can’t see the advantage an SMA has over a managed fund,” says Cormac Heffernan at BlackRock. “It’s just that evolution takes a bit of time.”

BOX: What’s the difference?

INDIVIDUALLY MANAGED ACCOUNTS

• You own the underlying shares
• A portfolio manager makes investments for you (but check their expertise!)
• The portfolio is customised to reflect your tax and ethical position
• If you want to change manager, you don’t need to sell your shares
• Full transparency of your holdings and transactions
• Can have quite high fees

SEPARATELY MANAGED ACCOUNTS

• You own the underlying shares
• You invest in a portfolio run by a professional manager
• You can’t customise that portfolio
• Transparency on your holdings – though some providers delay details on transactions to protect fund managers’ intellectual property

MANAGED FUNDS

• You own units in a trust, not the shares
• The manager’s investment specialists run the portfolio
• No customisation for your tax position
• If you want to get out, you have to sell your holdings in the fund
• Transparency varies but is usually limited to an occasional list of top holdings