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Running a managed account marathon
BY MARK SMITH | MONDAY, 19 APR 2021   2:39PM

Elston Asset Management has been running managed accounts for quite a few years now. So, apart from blisters and scuffed knees, what have we picked up along the way? Here are some lessons that might help advisers to get off on the right foot with managed accounts.

1: Don't let transparency trip you up

Managed accounts give investors the ability to see where their capital is invested. It's an empowering feature, especially when compared to the more opaque unit trust structure of traditional managed funds.

It can also be reassuring when clients can see and understand that their capital is invested in businesses (like Woolworths or Westpac) that they believe will come out of a crisis and continue to grow and be profitable.

The flipside is that transparency can also create uncertainty and short-termism if clients do not understand the investment philosophy or strategy underlying the managed account and the subsequent investment decisions.

Unlike a managed fund structure where portfolio managers can make investment decisions without clients seeing the investment transactions in real time, the transparency of managed accounts means investors do see transactions occur as they happen and are more likely to question the reasoning behind these transactions.

This investor uncertainty can increase the amount of reactive work (and stress) advisers experience as they inevitably are at the coal face defending the SMA managers decisions. We recognised this early on in our managed accounts journey and realised that the traditional funds management communication model, with portfolio updates provided at the end of the month would not suffice in a world where clients were seeing transactions occur in real time.

To help advisers manage this, we developed "real time" communications to provide advisers with portfolio updates via SMS and video within 48hrs of an investment decision to ensure advisers could be on the front foot with client investment communications.

In addition to more proactive investment communications, we also recognised that it is equally important for investors and advisers to have a clear understanding of the investment philosophy or strategy behind the investment decisions they were seeing.

Knowing for instance that Elston has a long-term focus as part of our investment philosophy, with a minimum three-year investment timeframe helped our investors make sense of why we were purchasing Sydney Airports last year, despite some of the short-term challenges that the company faces.

We've found that being able to clearly and consistently communicate our philosophy builds comfort and helps develop trust. Developing a consistent investment communication strategy that is both scalable and efficient is key to any successful managed account model.

2: Running rings around old tax models

When the first managed accounts were created, it was to essentially "de-unitise" managed funds to deliver more transparency, and potential tax efficiencies.

It is my opinion that SMAs should aim to maximise the after-tax outcome for investors by where possible, observing 45-day holding rules for franking credit eligibility and 12 months CGT discount rules when considering portfolio changes.

Another key feature of managed accounts, which is often overlooked, is the ability to transfer in-specie assets between risk-based managed account models without having to "cash out" of more traditional unitised investments. This can potentially deliver significant tax savings for clients over the course of their lifetime.

3: Avoid detours

It is inevitable that short-term underperformance will occur. And when it does, it may be tempting to take a detour.

But it's important to stay the course.

Explain your investment approach and have advisers and investors understand how the managed account is invested and why it is critical.

For instance, at Elston we adopt a style-neutral approach and incorporate both value and growth factors into our portfolio construction process.

During the past 18months when growth clearly outperformed value globally, the temptation for many value managers would have been to move away from value and chase growth. In fact, they could be forgiven for thinking that "this time it's different" and "value is dead".

However, having the discipline to stick to the investment strategy, and not chop and change, ended up being a good decision. We saw the pendulum swing back towards value and more cyclical investments in late 2020 and pay handsomely for those managers that maintained their conviction and remained true to label.

Importantly for investors, seeing investment managers stay the course and effectively do what they said they would do, is essential to earning trust.

4: It's not a sprint

Given the recent proliferation in managed accounts, it is not surprising that advisers are having to research and review managers based on short track records.

Coupled with a highly competitive market, it has become common to see short-term performance numbers spruiked by some providers without a deeper discussion around the risk taken, or how much of that short-term performance was driven by the market or skill.

As an industry, we talk to investors about taking a long-term approach to investing, however it is interesting to note how quickly this can be forgotten when choosing investment options.

Now, this is not to say that a new managed account solution with a relatively short-term track record should be avoided. However, advisers and investors must look a lot deeper and really understand what we refer to as the 4P's- the People managing the investments; the Philosophy behind how they manage clients' capital; the Policies that provide the framework for how capital is invested, and finally the Process- is the managed account being managed to a disciplined and repeatable process.

It's also worth looking into the experience of the manager to manage investments within a managed account structure vs a traditional managed fund model portfolio.

Having come from a background of running individually managed accounts or IMAs, Elston has built a deep understanding of the nuances of portfolio execution and rebalancing across the various portfolio platforms, particularly with regards to managing direct equities within a diversified managed account.

This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person's individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement ("PDS") relating to the product and consider the PDS before making any decision about whether to acquire the product. You will find further details of the service we provide and any cost to you within the Financial Services Guide. Prepared by EP Financial Services Pty Ltd ABN 52 130 772 495 AFSL 325 252 ("Elston").