*This article is produced in partnership with Allan Gray

With the recent rise in popularity of managed accounts, you may be forgiven for thinking that the traditional diversified managed fund has been relegated to the back of your wardrobe, with your Walkman, Reebok Pumps and your Myspace log in.

We, however, believe the role of these funds is more pressing than ever before. We see a new role for diversified managed funds in almost any multi-asset portfolio and when held alongside or within a managed account, the result is potentially better client outcomes.

The rise and rise of the managed account

Managed accounts have seen phenomenal growth within Australia and have come to dominate the multi-asset industry. Separately managed accounts (SMAs) saw a 34 per cent increase in funds under management (FUM) in the FY23 financial year, growing from $70.6 billion to $94.9 billion. It’s easy to see why.

Much of this FUM growth is attributable to the increased regulatory burden placed on Australian financial advisers, and a resulting need to run advice practices more efficiently. Effectively, managed accounts allow an adviser to partially, or completely, outsource investment management decisions to an external party. Complete outsourcing occurs when advisers recommend ‘off the shelf’ managed accounts run by external investment consultants to their client base. There are approximately 1100 such products on offer already, with two thirds being diversified solutions. The other route some practices have taken has been to work with a consultant to build and implement their own products, then launch customised managed accounts for their own client base.

Crucially, changes to such investment portfolios after implementation do not require a record of advice to be completed with individual clients, which is why the top-ranking benefit cited by advisers that have adopted managed accounts has been the freeing up of their time.

It has been interesting to see managed accounts gain such traction, when an existing solution, the diversified managed fund, arguably solved the same set of issues facing the industry. Using an active, diversified fund for clients transferred responsibility to a professional funds management business, and subsequent changes to the portfolio by the manager needed no client consultation and documentation.

One problem these funds faced, however, was that employing a single entity to build an actively managed, diversified portfolio on behalf of clients was seen as too risky, or as giving too much responsibility to one external party. It didn’t matter how well-resourced and experienced, or how strong the manager’s track record was. That viewpoint seems to have changed with the advent of the managed account, with some advisers entrusting all their client capital to the decision-making process of one investment consultant and/or one investment strategy. This is a seismic shift in adviser mentality and cannot be understated.