Are separately managed accounts a viable option for SMSFs?

Arthur Naoumidis explains how separately managed accounts may provide a solution for SMSF investment strategies.

One of the key problems for many self-managed su­perannuation funds (SMSFs) is establishing and maintaining an investment strategy.

Many funds do not benefit from professional in­vestment management, with the latest statistics from the Australian Taxation Office (ATO) showing that of the $286 billion held in 378,656 SMSFs, 33 per cent is held in direct eq­uities versus around 19 per cent in managed investments.

Cash also remains popular, with al­locations ranging from 20 per cent for larger funds to 50 per cent for smaller funds.

Given professional man­agement could help align in­vestments with SMSF invest­ment strategies, why do SMSFs continue to prefer di­rect equity investments to managed investments?

Once you have been sold on the merits of a SMSF (in par­ticular its greater control, flex­ibility, transparency and tax planning potential), holding as­sets within a traditional opaque, inflexible and non-transparent managed fund is counterintu­itive.

You may as well have left the assets in your old super fund and not bothered to create the new structure. The cost of pro­fessional management may also be a deterrent.

Instead, SMSFs have been drawn to domestic di­rect equities, disregarding the professional management and international exposure merits of managed investments.

Separately managed accounts (SMAs) have the potential to turn this trend on its head.

The investment models available within SMAs are managed by professionals, however the un­derlying technology enables SMSFs to achieve an enhanced investment experience that is more aligned with that of direct equities.

The trustee receives a rich, transparent view of the un­derlying securities along with the advantages of beneficial ownership, and can increase their level of control by taking advantage of customisations, re­balancing capability and more timely delivery of end of year reporting information.

The customisations offered by some SMA providers really appeal to a SMSF’s requirement for greater control and flexi­bility over its investments.

This capability allows trustees to ex­clude particular securities from the SMSF holdings even though the professional investment manager may choose to hold it within their model. Alterna­tively, the trustee could choose to substitute one security with another.

These customisations may be particularly relevant where the SMSF already holds particular securities within its portfolio and wishes to limit ad­ditional exposure. It even en­ables the trustee to consider the inclusion of ethical invest­ment guidelines within their trust deed.

SMAs can also streamline portfolio rebalancing.

The port­folio’s initial asset allocation is set when the SMA is established and can be easily adjusted using just one screen to reset the port­folio to a new allocation.

Im­portantly, the SMA technology ensures that this rebalancing process is cost effective as well as administratively efficient.

Rather than incurring the costs associated with completely sell­ing one fund and buying a new fund, the SMA simply sells the particular underlying securities required to result in the new al­location.

Trading costs are fur­ther minimised by netting these security transactions against the trades of other investors. As SMAs grow, it is conceivable that these trading costs will approach zero.

The timeliness of reporting for SMSFs can also be enhanced through the use of SMAs. First­ly, the online reporting capabil­ity provides the trustee and ad­ministrator with 24/7 access to run investment reports at any time they choose.

Secondly, the corporate ac­tions and other transactions that take place within the port­folio are automatically updat­ed.

This significantly stream­lines the administration of equity portfolios and enables the administrator to ensure the portfolio is up-to-date through­out the year rather than need­ing to wait until the end of the financial year.

Thirdly, the administrator is not reliant on the often inac­curate and slow distribution of end of year tax break ups by fund managers, as all the un­derlying securities tax informa­tion for the previous year is available on the SMA system on the first day of the new financial year.

Lastly, some SMAs provide direct data downloads into the SMSF compliance system, min­imising re-keying of data and im­proving accuracy. This also im­proves the speed at which the end of year reporting for the SMSF can be completed.

Potential future enhance­ments, such as risk-based mod­els and automated life-styling, will only serve to strengthen this alignment between SMAs and SMSFs.

Risk-based models have the potential to provide all the transparency, flexibility and con­trol desired by SMSFs whilst also ensuring that a profession­al investment manager adjusts the underlying asset allocations to maintain a particular risk profile.

Life-styling models could also automatically adjust the asset allocation from growth to income assets as the bene­ficiaries approach retirement.

With such a strong psycho­logical and administrative fit, we are likely to see significant adoption of SMAs within the SMSF market.

SMAs are able to deliver the control, flexibility, transparency and timeliness so desired by SMSFs and offer more confidence to trustees that their fund is aligned with their defined investment strategy.

It is relatively early days in SMA development and future en­hancements will only serve to strengthen the appeal of SMAs to SMSFs.

Arthur Naoumidis is the group chief executive at Praemium.