*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.
Questioning the orthodoxy
As an active fund manager with both single and multi-asset offerings, it should be said that we exist in this ecosystem and have benefitted significantly from managed account adoption, where our highly rated Allan Gray Australia Equity Fund has seen use. We are however contrarian by nature (it’s the foundation of our entire investment philosophy), so we naturally question orthodoxy, what is most popular at any one time, and conversely what is out of favour.
With managed accounts currently dominating the multi-asset space and diversified funds firmly wedged at the back of the wardrobe, we thought it would be useful to take a closer look at these offerings and the relative advantages offered by each. You can see these key differences in product structures in the table below:
Key differences between diversified managed accounts and managed funds
| Diversified SMAs | Diversified Managed Funds | |
| Asset Ownership | Investors have beneficial ownership of assets underlying the managed account | Investors own units in the fund, rather than the underlying assets themselves |
| Transaction Transparency | Investors have complete transparency over transactions | Transaction disclosure is at the fund manager’s discretion and generally more limited |
| Accessibility | Must be accessed via an investment platform | Can be accessed by platform, or via direct investment with the manager |
| Fee Comparability | Investment fees can differ depending on the investment platform selected, complicating comparisons | Each unit class will have the same fee structure for all investors |
| Performance Comparability | Performance outcomes can differ across clients, due to differences in trading and rebalancing procedures, and fees, across platforms | Each unit class will provide the same, published investment outcome for investors |
| Investment Options | SMAs may be able to invest in underlying managed funds that can use investment tools such as forwards and futures, but are limited in their ability to directly use such tools themselves | Managed funds can use a range of derivatives to control risk at the portfolio level, including futures, forwards and options, depending on the fund mandate |
Source: Allan Gray Australia
The table above illustrates that there are both benefits and drawbacks to each structure. One crucial difference is in the way the portfolios are built. There are very few managed accounts in Australia with direct security exposures for both domestic and international share holdings, and even fewer also holding security level fixed income positions in both Australian and Global markets. Generally, they are constructed using a building block approach.
But the humble managed fund has some distinct advantages
There are a number of relative advantages offered by the diversified managed fund structure, that we believe warrant discussion and consideration, as each of these factors could lead to better outcomes for the client. These include:
- The ability to take a bottom-up, security by security approach to portfolio construction, which enables the manager to analyse the entire capital structure of a business and decide which securities (if any) might be attractive, whether it be equities, bonds or hybrid offerings;
- Being able to hedge markets ensures the manager can protect the downside risk at a portfolio level; and
- Actively managing currencies in a targeted manner, using forwards. By divorcing equity research from currency research, you can still seek out attractive investment opportunities in countries where you believe the currency is overvalued.
We will delve into this in more detail in our next article.
Managed accounts have taken centre stage in recent years, but we are challenging the current approach and believe advisers should consider investment outcomes where multi-asset managed accounts are blended with multi-asset, diversified managed funds.
This approach will not only reduce the risk of using a single investment approach but could deliver stronger long-term results for investors.
Disclaimer: intended for advisers only and published by Allan Gray Australia Pty Limited ABN 48 112 316 168, AFSL No. 298487. Equity Trustees Limited ABN 46 004 031 298, AFSL 240975 is the responsible entity and issuer of units in the Allan Gray Australia Equity Fund (ARSN 117 746 666). Equity Trustees is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT).
This information is of a general nature, doesn’t take into account the objectives, financial situation or needs of any individual and may not be appropriate for you or your client. Before acting on anything in this article, you should consider its appropriateness to you, having regard to your objectives, financial situation and needs. You should obtain and consider the relevant Product Disclosure Statement relating to any products mentioned, before deciding whether to acquire any products. Neither Allan Gray, Equity Trustees nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Read the relevant disclosure documents before making any investment decision. Target Market Determinations (TMDs) for the Allan Gray products can be found at allangray.com.au/PDS-TMD-documents. Each TMD sets out who an investment in the relevant Allan Gray product might be appropriate for and the circumstances that trigger a review of the TMD. Please read the Fund’s most recent Product Disclosure Statement and Information Booklet (together PDS) before deciding to invest in the Funds. A copy is available from https://www.allangray.com.au/b/forms-documents. Past performance is not a reliable indicator of future performance, and there are risks with any investment.
