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Market Insights

Individually Managed Accounts - What is all the fuss about?

29/5/2018

1 Comment

 
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.
    
​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
No
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."
1 Comment
Mike Christensen
8/6/2018 07:54:11 am

Great Article Darren. Well written and well explained. Investors now have more choice than ever which is great. However, with choice comes the need to understand the pros and cons of the various options i.e. the "why".

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​The information provided on this website should not be considered financial or investment advice and is general information intended only for wholesale clients ( as defined in the Corporations Act). If you are not a wholesale client, you should exit the website. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions. Where the website refers to a particular financial product, you should obtain a copy of the relevant product services guide or offer document for wholesale investors before making any decision in relation to the product. Investment returns are not guaranteed as all investments carry some risk. The value of an investment may rise or fall with the changes in the market. Past performance is no guarantee of future performance. This statement relates to any claims made regarding past performance of any Tamim (or associated companies) products. Tamim does not guarantee the accuracy of any information in this website, including information provided by third parties. Information can change without notice and Tamim will endeavour to update this website as soon as practicable after changes. Tamim Funds Management Pty Limited and CTSP Funds Management Pty Ltd trading as Tamim Asset Management and its related entities do not accept responsibility for any inaccuracy or any actions taken in reliance upon this advice. All information provided on this website is correct at the time of writing and is subject to change due to changes in legislation. Please contact Tamim if you wish to confirm the currency of any information on the website.  

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