Separately Managed Accounts

Mitchell Capital has offered Separately Managed Account (“SMA”) since we opened our doors in 1987, in the belief they represent the most cost efficient way to manage investments for our clients. The investment vehicle(s) you employ shouldn’t drive the decision of how to invest, but you should understand their distinctions in order to engage that one most likely to help you reach your goals.

Most investors access the financial markets through one of three ways: mutual fund, Exchange Traded Fund (“EFT”) or Separately Managed Account (“SMA”). There are others such as commingled funds or common funds, but they are far less common.

You might decide to invest through a mutual fund, which was designed to offer smaller investors an easier way to access diversified portfolios with professional management and at less expense in an era of very high trading costs. You would hold shares representing your proportional ownership of the fund and a mutual fund share price is set and traded once per day. An analogy in the automotive world might be a good, reliable mid-sized sedan. They won’t be the least expensive option; some will be horribly overpriced and of little value. You will need to conduct due diligence to be sure you are finding the right fit for your needs at a reasonable cost.

Or you might decide to hold an ETF, also a diversified portfolio, but which is typically built to match a predetermined index. As with a mutual fund, you would hold shares that represent your proportional ownership. Unlike a mutual fund, an ETF trades on stock exchanges and is valued, and can be traded, throughout the day. Therefore it is considered more liquid, or more easily turned in to cash. This option might equate to a cheap, average, compact car. Price and basic functionality are paramount considerations. An understanding of what goes on underneath the hood is of much less importance.

A third option with a growing number of investors is an SMA. With an SMA, you own the investments directly rather than shares in a pooled fund. An SMA offers three distinct advantages over a mutual fund and an ETF.

• Transparency – the best investor is an educated investor. This extends to having a knowledge of the securities in the portfolio. A mutual fund will market itself with a descriptive name, but is otherwise required to publish its holdings only once a quarter. An ETF is typically built to mimic a benchmark, so will have hundreds or even thousands of names in each fund. Adequate knowledge is impossible due to the sheer volume. With an SMA and guidance of your investment manager, you are better able to know what stocks or bonds are in your portfolio and, more importantly, why they are there.

• Customization – a mutual fund or ETF can offer the masses an affordable mechanism for diversification, but they offer very little in the way of flexibility or control. SMA owners can customize their holdings by excluding certain securities or industries, such as tobacco or defense firms. They may also be overweight in their employer’s securities and an SMA may offer ways to diversify away from that name or sector. This kind of flexibility isn’t available with a mutual fund or an ETF. The mutual fund/ETF managers are too far removed from the investor to take into account any individual needs or requirements.

• Tax planning – holding investments in a taxable account presents its own set of issues. A mutual fund will often get hit with taxable distributions for transactions made within the fund, even if you didn’t sell any shares yourself. You may be left with a tax bill that is not of the amount or timing of your choice. An ETF won’t incur capital gains until you sell the shares yourself, but there will be some tricky tax questions around dividends based on how long you have held the ETF. For maximum flexibility in tax planning, an SMA offers the greatest latitude. Maybe you have tax losses elsewhere in your financial affairs and would like to harvest any gains in your SMA to offset. Or maybe you have sufficient gains this year and would prefer to push any extra gains off until next tax year. You can identify where and when to take gains and losses as it fits your situation.

Separately managed accounts have been around for more than fifty years, starting as an option for wealthier investors because trading costs were high and you needed a large body of assets to absorb them. As trading costs have declined significantly over the years, separately managed accounts have become a cost effective way to invest for more and more investors with portfolios as small as $100,000. This option might equate to a well-built, highly regarded SUV. You can chose whether and how to utilize the built-in flexibility, costs will be competitive for the value received, and you can customize to suit your goals and needs.