Timothy Budge, TAMIM Director of WA and SA, takes a look at the pros, cons and differences between managed funds, Individually Managed Accounts and Separately Managed Accounts.

Individually Managed Accounts vs. The Rest
- Timothy Budge -
30 August 2016

The investment management industry is constantly evolving amid economic turmoil and regulatory scrutiny. Calls for more transparency, greater liquidity and increased control by investors have given rise to a number of innovations. Chief among them has been the advent of managed accounts that attempt to mitigate the problems associated with managed funds. A cursory tour of the investment landscape will show us why managed accounts, especially Individually Managed Accounts (IMAs), are becoming increasing popular.

Traditionally, a wholesale investor had two choices if they wanted to partake in a pooled investment vehicle. They could invest directly in the commingled fund set up by an investment manager. Alternatively, they could invest indirectly in a fund of funds, which would then invest a proportion of it’s assets in underlying commingled funds. Both avenues are opaque and raised liquidity issues. In addition, an investor could be exposed to the irrational behaviour of others in the fund who might clamour for redemption at inappropriate times.

To address these concerns, individually and separately managed accounts have taken on increasing importance. They are similar to a pooled investment vehicle such as a managed fund in that a fee is paid to a manager who is charged with making investment decisions. However, they differ in significant ways. An investor in a managed fund owns units or shares in the fund that, in turn, holds shares in companies whereas the holder of a managed account holds the underlying company shares directly.

Individually Managed Accounts are a tailored investment management service and what we at TAMIM Asset Management offer our clients. IMAs provide a superior approach to portfolio management. Whereas, managed funds or Separately Managed Accounts (SMAs) are constructed on a 'model portfolio' basis where each investor receives exactly the same portfolio, based on a master portfolio assembled by the manager, IMAs are constructed individually for each investor, although, each account may share some common holdings.

These alternative methodologies mean that new investors in a managed fund or SMA may buy assets that have already enjoyed most of their returns, but remain in the model portfolio to avoid realising capital gains tax. IMA investors, however, will receive a portfolio that is assembled incrementally, as attractive opportunities develop, buying quality assets when they are cheap. Additionally, new investors in SMAs will receive larger holdings in stocks that have already performed well, while IMA investors are likely to receive larger holdings in stocks the investment manager believes will perform well in the future.

IMAs provide the ability to tailor the portfolio to the investor's tax circumstances. For instance, we may place more weight on generating franked dividends for a Self-Managed Super Fund (SMSF), while long-term capital appreciation is more valuable for a higher marginal tax rate account. These differences in investment management are an effort to produce the best after-tax result for each investor. The SMA manager cannot consider individual tax consequences or other individual considerations when making investment decisions.

IMA investors have ongoing access to the individual responsible for managing their portfolio and will receive personalised reporting and commentary.  When executing trades an IMA manager will attempt to get the best execution and/or exercise discretion over the timing of buys and sells for their investors.

By using the IMA structure you are not invested in a pooled vehicle and are therefore not subject to the actions of other investors or the business risk of the investment manager. You retain beneficial ownership of the assets while maintaining complete transparency of your portfolio.

	Managed Fund	Listed Investment Company (LIC)	Separately Managed Account (SMA)	Individually Managed Account (IMA)	Exchange Traded Fund (ETF)
Tax Efficiency	Poor	Moderate	Very Good	Excellent	Good
Transparency	Poor-moderate	Moderate	Excellent	Excellent	Good
Direct ownership of assets	No	No	Yes	Yes	No
Embedded tax liabilities	Usually	Usually	No	No	Sometimes
Portfolio construction	Discretion of manager	Discretion of manager	Model portfolio	​Discretion of manager	Discretion of manager
Tailored management	No	No	No	Yes	N​o

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