Mutual Funds vs. Separately Managed Accounts

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Mutual Funds vs. Separately Managed Accounts

Sam Bourgi

|

Mutual Funds vs. Separately Managed Accounts
In the investment world, the wealth divide between retail and institutional investors is well understood. What’s often overlooked is the varying degrees of wealth within these two groups.
Institutional investors are generally considered to be very wealthy relative to their counterparts in the retail world, but not every ‘institutional’ class participant can afford top-end advisors or highly sought-after managed strategies. As a general rule, managed strategies for institutions have a minimum investment requirement of $25 million or more.

To bridge the divide, a new class of separately managed accounts (SMAs) has burst onto the scene. This article will explore the nuances.

Defining SMAs

SMAs are geared toward wealthy individual investors who don’t meet the minimum threshold of traditional managed accounts. They provide investors with choice in how they access professional investment management strategies.

Simply put, a separately managed account provides a portfolio of assets managed by a professional investment firm. In the United States, these firms are typically classified as registered investment advisors (RIAs) and are regulated by the U.S. Securities and Exchange Commission (SEC). With an SMA, an investor’s entire portfolio is under the direct control of a portfolio manager; they manage the day-to-day investment decisions with support from their team of analysts and administrative staff.

SMAs vs. Mutual Funds

In general, SMAs and mutual funds differ along the following lines:

Customization

As the name implies, a separately managed account is unique to the needs and goals of the individual investor. As such, SMAs differ from traditional pooled investment vehicles like mutual funds, which are shared by a group of investors. Moreover, an investor can even customize an SMA to his or her preference, including single or multiple style SMA or environmental, social and corporate governance (ESG) screen-based SMA.

In fact, mutual funds do not offer customization options due to their structure and are instead geared toward certain investment objectives and risk tolerances.

Ownership

SMAs and mutual funds are similar in that you are paying for the investment services of a professional money manager. Where they differ is in how your funds are allocated. In a mutual fund, your investment goes toward buying shares in the fund itself. Each share represents a piece of the overall pie, usually expressed as a percentage. With a separately managed account, your manager purchases securities on your behalf. This means actually owning an individual stock.

Convenience

Although SMAs provide a unique advantage in terms of customization, they can’t match mutual funds in terms of convenience. There are literally more than 9,000 mutual funds in the United States alone. There’s no investment goal, risk tolerance or sector not covered by mutual funds. Because they are highly liquid, they can be bought and sold with relative ease.

With a separately managed account, you have to complete a questionnaire before you invest and must be willing to hand over the reins to your portfolio managers. Some managers have limited liquidation options, which means you can’t cash out whenever you want.

Be sure to read this article to know more about the differences between a mutual fund and a collective trust fund.

Taxation

In terms of tax efficiency, SMAs have the edge because investors have the option of asking their manager to be as tax efficient as possible. This means offsetting gains and losses in the account so that they are not liable for capital gains taxes. This isn’t the case with mutual funds, which are required by law to pay out income and capital gains to investors.

Transparency

Unlike mutual funds, where your holdings are determined solely by the manager using methods only known by him or her, with an SMA you receive regular comprehensive reporting on your account. This includes account statements to show the securities you own and their underlying performance over time.

Be sure to check our News section to keep track of recent fund performances.

The Bottom Line

Mutual funds and separately managed accounts have their distinct advantages and can be used to grow your portfolio over time. SMAs are a good option for institutional investors who don’t quite meet the rigorous capital requirements of most managed account strategies.

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Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next

Mutual Funds vs. Separately Managed Accounts

Mutual Funds vs. Separately Managed Accounts

Sam Bourgi

|

In the investment world, the wealth divide between retail and institutional investors is well understood. What’s often overlooked is the varying degrees of wealth within these two groups.
Institutional investors are generally considered to be very wealthy relative to their counterparts in the retail world, but not every ‘institutional’ class participant can afford top-end advisors or highly sought-after managed strategies. As a general rule, managed strategies for institutions have a minimum investment requirement of $25 million or more.

To bridge the divide, a new class of separately managed accounts (SMAs) has burst onto the scene. This article will explore the nuances.

Defining SMAs

SMAs are geared toward wealthy individual investors who don’t meet the minimum threshold of traditional managed accounts. They provide investors with choice in how they access professional investment management strategies.

Simply put, a separately managed account provides a portfolio of assets managed by a professional investment firm. In the United States, these firms are typically classified as registered investment advisors (RIAs) and are regulated by the U.S. Securities and Exchange Commission (SEC). With an SMA, an investor’s entire portfolio is under the direct control of a portfolio manager; they manage the day-to-day investment decisions with support from their team of analysts and administrative staff.

SMAs vs. Mutual Funds

In general, SMAs and mutual funds differ along the following lines:

Customization

As the name implies, a separately managed account is unique to the needs and goals of the individual investor. As such, SMAs differ from traditional pooled investment vehicles like mutual funds, which are shared by a group of investors. Moreover, an investor can even customize an SMA to his or her preference, including single or multiple style SMA or environmental, social and corporate governance (ESG) screen-based SMA.

In fact, mutual funds do not offer customization options due to their structure and are instead geared toward certain investment objectives and risk tolerances.

Ownership

SMAs and mutual funds are similar in that you are paying for the investment services of a professional money manager. Where they differ is in how your funds are allocated. In a mutual fund, your investment goes toward buying shares in the fund itself. Each share represents a piece of the overall pie, usually expressed as a percentage. With a separately managed account, your manager purchases securities on your behalf. This means actually owning an individual stock.

Convenience

Although SMAs provide a unique advantage in terms of customization, they can’t match mutual funds in terms of convenience. There are literally more than 9,000 mutual funds in the United States alone. There’s no investment goal, risk tolerance or sector not covered by mutual funds. Because they are highly liquid, they can be bought and sold with relative ease.

With a separately managed account, you have to complete a questionnaire before you invest and must be willing to hand over the reins to your portfolio managers. Some managers have limited liquidation options, which means you can’t cash out whenever you want.

Be sure to read this article to know more about the differences between a mutual fund and a collective trust fund.

Taxation

In terms of tax efficiency, SMAs have the edge because investors have the option of asking their manager to be as tax efficient as possible. This means offsetting gains and losses in the account so that they are not liable for capital gains taxes. This isn’t the case with mutual funds, which are required by law to pay out income and capital gains to investors.

Transparency

Unlike mutual funds, where your holdings are determined solely by the manager using methods only known by him or her, with an SMA you receive regular comprehensive reporting on your account. This includes account statements to show the securities you own and their underlying performance over time.

Be sure to check our News section to keep track of recent fund performances.

The Bottom Line

Mutual funds and separately managed accounts have their distinct advantages and can be used to grow your portfolio over time. SMAs are a good option for institutional investors who don’t quite meet the rigorous capital requirements of most managed account strategies.

Sign-up for our free newsletter to get the latest news on mutual funds.


Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next