TAMIM founder and managing director, Darren Katz, revisits the topic of individually managed accounts.
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. According to the Institute of Managed Accounts Professionals there has been a growth of funds managed through IMA's of $8.8 billion to $48 billion over the 12 months to the end of July 2017. While we don't yet have the numbers for 2018, the Royal Commission will see to it that there is a significant growth in the use of managed accounts. 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 a commingled fund set up by an investment manager. Alternatively, they could invest indirectly via 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 - known as redemption risk.
To address these concerns, individually and separately managed accounts have taken on increasing importance. They are similar to a pooled investment vehicles 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.
One key and mostly under-appreciated aspect of individually managed accounts is the ability to structure the account according to the investors needs. Clients of the TAMIM IMAs will quite often have a requirement for a regular income stream on a monthly and quarterly basis. The IMA structure allows for this income requirement to be matched by payments from the IMA. While it is important to take into account the return of the underlying portfolio and the effects of inflation, the IMA is malleable to the investors requirements as opposed to the managed fund or LIC approach of "you can have any colour as long as it is black."
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.