For investment managers, the 1990s bull market offered plenty of ways to prosper other than by investing in Internet stocks. One winner: separately managed accounts, or securities portfolios customized by a financial adviser for individual clients, often with securities selection outsourced to third-party managers. So rapidly did separate accounts grow -- from $175 billion under management in 1996 to $425 billion in 2000, according to the Washington-based Money Management Institute -- that some enthusiasts predicted the eventual demise of one-size-fits-all mutual funds.
The onset of the bear market in 2000 halted SMAs’ momentum, but the reasoning behind the market optimism for these portfolios was sound. Cost-effective Internet technologies make it easier to actively manage and service SMAs. Newly wealthy investors, meanwhile, have many reasons to prefer their flexibility and personalization to more-static mutual fund investing: SMAs can be tailored to minimize taxes for clients; most mutual fund managers get paid for pretax returns.
SMA balances, reflecting market losses, slipped below $400 billion in 2003, but by early 2005 they had topped $600 billion, and MMI is projecting $2 trillion under management by 2011. In contrast, the $8.1 trillion mutual fund market has shown no net growth since 2000.
“Technology enables sponsor firms like ours to manage multiple-strategy portfolios, meaning we can effectively coach an all-star team of money managers,” says Harry Clark, founder and CEO of Philadelphia’s Clark Capital Management Group, which runs $800 million using homegrown portfolio and risk software. Clark says the typical SMA has $250,000 in assets but that even a $100,000 portfolio can be managed less expensively than an adviser-constructed portfolio of mutual funds. “The mainstream investing public may not fully understand that they can get institutional-quality money management at less than retail prices,” he adds.
Investors are catching on, though, judging by a recent flurry of activity among technology suppliers. New SMA systems give small-account advisers access to more products from money managers than they previously had. The systems also allow firms offering SMAs to customize or create such private-label customer relationship management functions as account statements, performance reporting, billing and e-mail or instant messaging alerts.
Take, for example, Atlanta-based CheckFree Corp., which reports that 1.7 million portfolios are managed on its investment services system. One customer, St. Petersburg, Floridabased Raymond James Financial, said in October that it was replacing its in-house, 100,000-customer SMA platform with CheckFree’s. The following month CheckFree announced a system upgrade, Enhanced Portfolio Lifecycle, designed to improve operating efficiency.
In the same vein, SunGard Data Systems’ Sacramento, California based SunGard Advisor Technologies unit last September introduced its Unified Overlay Management Program. “SMA infrastructure can be very costly,” notes George Myers, group executive vice president of SunGard Asset Management Systems. “We wanted to lower the cost of entry versus a highly customized solution while taking automation of portfolio selection -- coordinating the key elements of return, risk and taxes -- to a new level.”
In the past few months, Citigroup Global Transaction Services, J.P. Morgan Investor Services, Charles Schwab Corp.'s Schwab Institutional unit and State Street Corp. -- all providers of custody and other support services to money managers -- have stepped up their SMA activities. “We are in a unique position to understand the trading and operational requirements of both managers and sponsors,” explains Chandresh Iyer, fund services project manager at Citigroup, which launched SMA outsourcing for asset managers in December.
The SMA model has also been a boon to two dot-com-era financial technology start-ups. Vienna, Virginiabased Foliofn partnered with Nikko Cordial Corp. in April 2004 to introduce the concept to Japan. And Palo Alto, Californiabased Financial Engines began marketing SMAs to 401(k) plan participants in September. The company had $1 billion from 15,000 clients under management by year-end. With these new tools and a return to bubble-era growth, the SMA industry may soon be partying like it’s 1999.
