From Leaders in the SMA space
Martin Investment Management, LLC is a SEC registered investment advisor, located in Palm Beach Gardens FL and Evanston, Il. The firm offers separately managed accounts (SMAs) in five strategies covering the U.S., non-U.S. developed world, and global equities. Its strategies have earned 194 PSN Top Gun Awards highlighting the Best-in-Class SMAs.
Navigating allocation decisions in the face of rising inflation requires more careful stock selection than the current set of passive investment-based alternatives can deliver. Responding to dynamic changes in inflation, taxes, zero interest rates to higher ones, and fiscal policy dominance necessitates an adaptable strategy focused on changing investing environments. By integrating a fundamental analysis through a quality screen of a company’s profitability, cash flow and stewardship, SMAs deviate from the broader markets of passive investors to understand changes on a company level.
We at Martin Investment Management, LLC believe that inflation distorts the book value of a company and the real value of a firm’s balance sheet assets. It can impact nominal discount rates and the year-over-year comparison of financial statement data. A robust investment process adjusts for impacts such as inflation.
Investors benefit from separating the high profitability growth stocks from the low profitability ones before blanketly assuming that inflation is equally detrimental for all growth stocks. Companies with a strong competitive advantage should be better equipped to raise prices to offset inflationary pressures. If a firm relies on fixed-rate liabilities, rising inflation provides a benefit by lowering the real value of liabilities.
We have taken pride in managing the complexities of SMAs since 1989. With over 100 years of combined experience, our portfolio managers have a long heritage in understanding the benefits of wealth creation and capital preservation which SMAs strive to obtain. Our experience in domestic and international markets, economic expansions and recessions is evident in our expertise and track record. Our five strategies have been recognized for superior performance over several decades. While inflation is one example, our dynamic and collaborative team uses a
long-term approach to investment management. Our portfolio managers have the patience and the perseverance required to appreciate nuances in the marketplace and most importantly the power of compounding returns over time.
Owning individual equities within a SMA allows advisors to customize client portfolios, enhance tax management, and provide transparency through comprehensive reporting. Clients can choose to grow their capital, increase retirement income, or align their portfolio with their personal values. While the enhanced tax management, portfolio customization, and broad transparency are often cited as the main benefits of SMAs, investment expertise and professional oversight are equally significant.
We have established proprietary methods to review individual company fundamentals through a disciplined valuation process,
Owning individual equities within a SMA allows advisors to customize client portfolios.
taking into consideration market risks which may influence a portfolio’s performance. We review the intrinsic value of investable companies, their growth, and the market price buy them. By holding a focused portfolio of 25 to 30 names, we aim to address what matters most to investors, return on their investments.
As investors increasingly prefer to hold a basket of more passive alternatives, we have confidence that our SMAs provide an opportunity for investors to hold individual companies. Existing passive approaches can rely on overly simplistic metrics to represent an increasingly complex economic reality. They have failed relative to a complete proprietary approach. The importance of objective repeatable factors, such as traditional security analysis and valuation, cannot be understated.
Once reserved for institutional investors and ultra-high-net-worth clients, separately managed accounts (SMAs) are growing ever more popular in U.S. wealth management portfolios. Mutual funds have been advisors’ vehicle of choice for wealth management clients historically, and exchange-traded funds (ETFs) continue to grow. Yet advisors are also increasingly turning to SMAs, which allow for more customized investment solutions for clients and help advisors differentiate their product offerings in an increasingly competitive market.
Source: Cerulli Associates – The Cerulli Edge: U.S. Managed Accounts Edition, 2Q 2023.
How are advisors using SMAs in portfolio construction?
We believe advisors should work with managers who share their investment philosophy and offer strategies that align with their clients’ goals. Scale and operational expertise are also important, as is market access. In fixed income especially, efficiency and investment research are equally important in seeking returns and mitigating risk. While advisors traditionally have utilized SMAs for equity allocations, they are increasingly using these vehicles for fixed income allocations, particularly in tax-exempt municipal bonds. We’ve observed that advisors are tapping SMAs to pursue tax advantages for clients, and in fixed income accounts where there is a desire to hold bonds in certain strategies to maturity. Advisors who historically built portfolios of individual bonds or relied on their trading desks to source bonds may find professionally managed SMAs increasingly appealing.
Lower turnover is another potential benefit. In our experience, clients and advisors tend to hold their SMA positions longer than mutual fund or ETF vehicles
Why do advisors like using SMAs in portfolio construction?A: Advisors like SMAs for all the reasons individual investors do, and primarily because they offer the flexibility to tailor portfolios to their clients’ individual objectives. In addition, SMAs can help advisors keep total costs down (e.g., by aggregating client accounts with a professional manager) and can provide added transparency into their clients’ portfolios. The added level of customization at the individual security level may also help manage tax-related decisions. Increasingly, advisors are outsourcing SMAs to professional managers with the ability to combine a consistent investment approach with the tools to customize portfolios at competitive fees. This may provide an advantage by freeing up time for advisors to spend with clients to focus on financial planning.
How is PIMCO approaching SMA solutions for wealth management clients?Client experience is critical in SMA management given the transparency, additional operational complexities, and unique characteristics of each individual’s portfolio. A firm with an experienced and client-centric service culture can guide clients through any headaches and help enable the vehicle’s benefits to be realized. For example, detailed and customized reporting can help inform clients and advisors about the current makeup and potential outcomes of their investments. At PIMCO, we partner closely with financial advisors to help them deliver the right strategy in the right vehicle for their clients. We have invested heavily in portfolio management resources and technology to enable advisors to take full advantage of the SMA vehicle. From onboarding to customization to reporting, we focus heavily on helping financial advisors deliver unique, differentiated solutions to their clients.
PIMCO has been named to the PSN Top Guns list of best-performing separate accounts, managed accounts, and managed ETF strategies for 4Q 2023. Discover why thousands of advisors turn to PIMCO SMAs for their clients’ fixed income investing needs. Investment minimums start at $100,000.
Through a combination of PSN’s proprietary performance screens, the PSN Top Guns list ranks products in six categories in over 75 universes based on continued performance over time. The peer groups were created using the information collected through the PSN investment manager questionnaire and uses only gross-of-fee returns. Mutual fund and commingled fund products are not included in the universe. PSN Top Guns investment managers must claim that they are GIPS compliant.
PIMCO’s Long Duration (PSN Long Maturity Universe), Global Aggregate Unhedged (PSN Global Fixed Income Universe), California Municipal Opportunities Value (PSN Municipals Universe), National Municipal Opportunities Value (PSN Municipals Universe) and StocksPLUS International Hedged (PSN EAFE Universe and PSN International Fixed Universe) strategies were named a Top Gun Manager of the Decade, meaning the strategies had an r-squared of 0.80 or greater relative to the style benchmark for the latest 10-year period. Moreover, the strategy’s returns were greater than the style benchmark for the latest 10-year period and also standard deviation less than the style benchmark for the latest ten-year period. At this point, the top ten performers for the latest 10-year period become the PSN Top Guns Manager of the Decade. The PSN Long Maturity Universe, PSN Global Fixed Income Universe, PSN Municipals Universe, PSN EAFE Universe, and PSN International Fixed Income Maturity Universe is composed of 105 firms and 210 products, 70 firms and 183 products, 98 firms and 213 products, 132 firms and 223 products, 64 firms and 145 products, respectively.
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification does not ensure against loss. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing the strategy. PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Any tax statements contained herein are not intended or written to be used, and cannot be relied upon or used for the purpose of avoiding penalties imposed by the Internal Revenue Service or state and local tax authorities. Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager and such opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2024, PIMCO Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 | 800.387.4626
We see compelling reasons why more and more advisors are using SMAs in client portfolios.
By Dan Houlihan
Today’s institutional investment management firms are up against more challenges than ever before. Regulators continue to up the regulatory ante, operating costs are under increased scrutiny and the talent war rages on. At the same time, rapidly shifting macroeconomic expectations are influencing changes in investor demands that require nimble responses from investment managers. It’s against these constraints that firms find themselves increasingly looking for new ways to free up valuable time and resources in order to respond and optimize their businesses strategy.
The middle office is one of the most logical starting points we see when firms are starting to assess where efficiencies are to be made. For example, the investment book of record (IBOR) is a common target for firms to outsource and includes everything from post trade execution to performance analytics and end client reporting. Many argue the middle office is not a core competency and represents an opportunity to reduce costs and move to a variable cost model to drive efficiency and operating leverage.
Outsourcing the middle-office isn’t a new trend – large deals in the late '90s/early 2000s laid the foundation for today’s operations. This leaves lots of room for opportunity, with the potential growth difference for the middle office outsourcing market between 2023 and 2028 reaching $3.67 billion, according to the Technavio Middle Office Outsourcing Market Report.
While often missed, outsourcing the middle office should be seen not only in cost and core competency terms – but also as a strategic lever. The middle office solution is the platform on and through which a firm’s business strategy is executed. Whether it's launching new products faster, adding new asset classes or expanding to new jurisdictions, the middle office platform is critical.
Theoretically, an outsourced middle office allows a firm to execute that strategy faster and more efficiently than can otherwise be done on an internal infrastructure. As a simple example, a domestic, long equity manager looking to trade derivatives may not have the systems capability or human capital to do so. With an outsourced middle office – there is substantial cost avoidance and speed to market gains on outsourced infrastructure. Buying new systems or re-tooling legacy systems and hiring new expertise takes time and capital. In an outsourced model, you can essentially just test and turn it on with complete transparency into timeline and cost.
From a provider perspective, our view is that the long-term key is to enhance the value of client data through analytics with insights; delivered through a dynamic client experience. In many cases, firms outsource to impact the margin side of their business. The providers’ goal should be to provide insights to make the client smarter whether that is things like behavioral analytics, pattern recognition, etc. The question to ask beyond the obvious operational aspects of the middle office is what value will my provider give me in terms of operating insights now and into the future.
From a forward-looking perspective, there are many fintechs driving innovation in this space. Cloud-native solutions are pushing out technology faster and through lower cost than deployment models.
Lastly, what we do know is that bull markets tend to enable, if not mask growing fixed costs. These are exposed in a down market cycle. Sophisticated managers understand the strategic value of outsourcing the middle office; a flexible operating platform to enable strategy execution and a hedge against market cycles.
STP Investment Services is a leading global provider of technology-enabled, end-to-end investment servicing solutions. See STP Investment Services full disclosures here
Dan Houlihan
Outsourcing the middle-office isn’t a new trend – large deals in the late '90s/early 2000s laid the foundation for today’s operations.
Separately Managed Accounts (SMAs) have become a popular option for individual investors seeking greater flexibility and control within their actively-managed portfolios. Unlike ETFs and mutual funds with predetermined holdings, SMAs provide a tailored investment solution offering flexibility, transparency, and tax benefits. As SMAs gain traction, however, investors or their designated investment professionals must also carefully evaluate factors like account minimums, manager specializations, and associated fees.
By tailoring portfolios to factor an investor’s profile, risk tolerance, time horizon, preferred allocations, and personal preferences, SMA managers strive to deliver personalized investment strategies designed to outperform benchmarks. These can include specific asset classes, market sectors, industries, and individual holdings. Restrictions can also be customized based on an investor’s preferences to align with their values including consumer preference, ESG, or faith-based holdings.
Individuals can see firsthand which stocks, bonds, or other securities they own on their account statement. Since these securities are held directly by the investor, rather than indirectly through an ETF or mutual fund, there is greater insight into investors knowing what they own. Greater transparency and visibility into holdings lend to investor confidence in their portfolios and in reaching their financial goals. Additionally, individuals maintain all benefits of share ownership for equities, including voting rights which can be exercised how an investor sees fit.
SMAs offer distinct tax advantages. Since an individual holds all securities directly, these holdings can be tax harvested. This process involves selling positions to realize a taxable event. The proceeds can then be left in cash or invested in comparable securities. While loss harvesting is the most popular, gains can also be harvested based on an individual’s tax situation. This process depends on the availability of gains or losses within the account based on market moves. Another tax benefit, contrary to mutual funds, is that SMAs are not subject to embedded capital gains. Through redemption and rebalancing, a mutual fund creates embedded capital gains, which are passed along to all investors in the fund, even if they didn’t sell their shares.
Whether accessed through wirehouses, broker-dealers, or registered investment advisers, SMAs offer a versatile vehicle for investment professionals seeking to optimize their client portfolios. The flexibility of SMAs enables you to deliver tailored solutions to help achieve your clients’ financial goals and objectives, regardless of if you’re managing multiple accounts or outsourcing to specialized sub-advisors.
When researching these solutions, it’s vital to look at account minimums, what specializations, if any, these managers have, as well as fees associated with running strategies. While customization may incur higher fees, the benefits of tailored solutions and tax efficiency often outweigh the costs for investors seeking a personalized wealth management strategy. Additionally, a financial advisor may outsource a client’s account to a sub-advisor or manage multiple accounts for a client, i.e., one account for bonds and one account for equities.
In an expanding and complex investable universe, SMAs empower investors to gain greater insight into what they own and take a more active approach to meeting their desired financial outcomes.
SMAs offer customized solutions, transparency, and tax advantages.
See Capital Wealth Planning LLC full disclosures here
Separately Managed Accounts (SMAs) offer a multitude of benefits that cater to the discerning investor. As the financial landscape becomes increasingly complex and tailored to individual needs, SMAs offer a dynamic and flexible approach to investing.
One of the core benefits of SMAs is the ability to tailor investment strategies to the specific goals, risk tolerance, and financial situation of an investor. Unlike mutual funds or ETFs, where investment decisions are made with a broad base of investors in mind, SMAs allow for a level of personalization that can significantly enhance investment outcomes. This bespoke approach ensures that the investor's portfolio is aligned with their long-term objectives and adjusted in real-time to reflect changing market conditions or personal circumstances.
Tax efficiency is a crucial consideration for any investor, and SMAs excel in this area through customized tax management strategies. SMAs provide the flexibility to harvest tax losses, defer gains, and strategically time the realization of income to minimize tax liabilities. This is particularly beneficial for investors in higher tax brackets or those with complex tax considerations, as it can lead to significant savings over time.
Customization in SMAs extends to risk management, allowing for the precise calibration of portfolio risk according to the investor's risk tolerance and capacity. Through direct management of the portfolio, investment managers can employ strategies to mitigate risk, such as diversification across asset classes, sectors, and geographies, or the use of derivatives for hedging purposes. This personalized approach to risk management can help protect the portfolio against market volatility and downturns, providing investors with greater peace of mind.
SMAs offer enhanced reporting capabilities and direct communication with the investment manager. This ensures that investors are well-informed about their investments and can make timely decisions based on comprehensive, up-to-date information. Custom reports can include detailed performance analytics, tax reporting, and insights into investment decisions, offering a transparent view of the portfolio's management.
The chart (Right) shows the changing landscape of customization using Separately Managed Accounts. SMAs offer a compelling solution for investors seeking a personalized approach to their investment strategy. Through direct ownership of securities, tax optimization, tailored risk management, and enhanced communication, SMAs provide a level of customization that is unparalleled in the investment world. As investors continue to seek out more personalized and efficient ways to manage their wealth, the benefits of SMAs underscore their value as a key component of a sophisticated investment portfolio.
Customization in SMAs extends to risk management.
Xponance is a multi-strategy investment firm whose primary goal is to be a trusted client solutions partner. Included in the Xponance ecosystem is Aapryl, which is a fintech research tool designed to identify skilled funds and SMAs.
Hypothetical scenario for illustrative purposes only © Russell Investments
It certainly has been a breakout year for generative AI, with innovative software like ChatGPT mainstreaming the technology in extremely user-friendly formats. AI as a concept, however, has been around since the 1950s, and machine learning has been applied across back-end systems for decades. What is different about AI today is how everyday workers and individuals are getting to interact with machine learning models in intuitive, fresh ways.
There is little question that this significant advancement will likely revolutionize the business landscape as well as our daily lives.
Today’s beneficiariesWhile the current iteration of generative AI is truly groundbreaking, we are in the very early innings of understanding and unlocking its business potential. Even so, it is already beginning to drive increased sales and new revenue and earnings gains, particularly for companies offering (or positioning to offer) innovative products and services that can help other businesses tap into the potential benefits of the technology. As we see it, the current opportunity set falls into three types of companies:
Building block businesses that provide the hardware and infrastructure necessary for building and deploying AI models. One such “building block” is semiconductor company NVIDIA, whose graphic accelerator chips have proved valuable in AI software development.
Data vaults that store the valuable, unique data critical for training AI models and ensuring accuracy and robustness. For example, video streaming provider Netflix and ecommerce and web services company Amazon.com collect and synthesize troves of customer data that ultimately enhance the companies’ AI-driven products and services.
Distributors with the ability and/or installed customer bases to get AI into the hands of end users. Think of workflow automation software company ServiceNow using its trusted relationship with thousands of enterprise customers worldwide to sell AI-enhanced productivity tools.
Key considerations for investorsThe opportunity is real. AI has the potential for huge disruptive implications on a major scale, similar to the introduction of groundbreaking advancements such as the internet and smartphones. Given the considerable market hype around the technology, investors need to be able to separate hyperbole from areas that are poised or already starting to generate revenue and/or cost control gains.
Businesses are just scratching the surface of this new frontier. Companies providing the foundation for AI development and application are the current winners, but the lion’s share of opportunities have likely yet to be conceived. We have seen this scenario play out time and again. Think of the semiconductor industry, initially built on military and government applications and then, because of forward-thinkers who recognized the consumer potential, experienced explosive growth and the establishment of Silicon Valley.
Significant unknowns exist and need to be navigated as utilization and adoption grow. For example, one concern from companies slow to implement AI large language models is they do not have a strong grasp of the legal liability risks. There are also ethical considerations around transparency, privacy, and potential unanticipated biases in sourced data. Another concern is the potential use of AI for nefarious purposes. Also, regulation has yet to catch up to the speed of innovation. These are all important issues that need to be addressed, but in our view, the positive implications of AI far outweigh any concerns.
Learn more about Zevenbergen Capital Investments at ZCI.com.
The investment team at Zevenbergen Capital Investments (ZCI) has worked together for over a decade, applying rigorous fundamental research to build high-growth equity portfolios. By maintaining an independent, fundamental research focus, the team is able to identify and capitalize on potential investment opportunities that may enhance performance results. ZCI believes that concentrated positions in well-researched companies, combined with active management decisions, will outperform broadly diversified benchmarks given an appropriate time horizon.
Nevertheless, when assessing its investment potential, it is important to remember that AI is fundamentally a combination of software code, statistics, and pieces of information that improves in quality with the volume of data ingested.
By Chuck Carlson, CFA - CEO, Horizon Investment Services LLC
“One size fits all” is not an idea that usually sits well with consumers. Just visit any grocery store. There’s a reason you see more than 17 different mustards, over 100 different beverage brands, and at least 10 different toothpaste flavors.
Consumers want choices.
Consumers want customized solutions.
Consumers want bespoke.
Take target-date mutual funds. Target-date funds, usually offered in five-year increments, gradually adjust the mix of stock and bonds to become more conservative as an investor ages and approaches retirement. Investors typically buy target-date funds based on the year they plan to retire. It’s a simple approach that has been marketed exceptionally well – target-date funds have captured more than $3 trillion in 401(k) and other retirement portfolios, for example. But target-date funds basically key off one data point – expected retirement date. If you are 55 years old with three kids, still-massive student debt, no savings, and hopes of retiring in 10 years, you will receive the exact same investment as a 55-year-old who plans to retire in 10 years but who has no kids, no debt, a six-figure salary, and a seven-figure savings account.
Aside from the obvious – these two investors, despite sharing the same age and retirement date, could hardly be more different – fiduciary issues come into play when trying to ram a “one-size-fits-all” solution into the investment process.
The good news is that the investment landscape continues to evolve, bringing more choices to individuals who want customized solutions.
SMAs are portfolios owned by an investor and typically managed by an investment firm, such as a registered investment advisor (RIA). Separately managed accounts are not “pooled” accounts, like a mutual fund. Rather, the account is set up and managed for the individual, with the individual owning directly each of the securities in the account.
SMAs offer a variety of advantages:
The accounts can be built around the individual’s specific needs and goals. Let’s say an investor wants the specific portfolio to generate cash flow. An SMA can be constructed to produce the cash flow at the appropriate risk level. The ability to create customized portfolios is especially attractive for affluent investors who may have unique investment requirements.
SMAs offer a certain tax efficiency not available in mutual funds. SMA holders can work with their managers to have greater control over realizing capital gains, for example. Also, the ability to “tax harvest” in SMAs – selling losers to offset winners – is a big advantage over mutual funds, which can lob unwanted capital gains on shareholders, even in years when the value of the fund has declined.
The ability to mix and match investments in an SMA provides a high level of flexibility. Within a single SMA it is possible to own individual stocks, individual bonds, exchange-traded funds, and even mutual funds, thus expanding the opportunity set for the SMA manager to meet the investor’s goals.
An underappreciated aspect of SMAs is the transparency they bring to the investment relationship. Investors can see exactly what they own, unlike in a fund. Knowing what is owned can be especially relevant for investors interested in socially-responsible or faith-based investing practices. Thus, for those investors, SMAs offer perhaps the best investment vehicle for achieving those goals.
Unfortunately, some of the most heavily promoted investment products have adopted a “one-size-fits-all” approach.
See Horizon Investment Services full disclosures here
All of these benefits make SMAs an attractive alternative for investors.
By Ryan Long, CFA | Director of Investments
At FocusPoint Solutions, one portion of our services includes assisting advisors with investment management, from both proprietary portfolios as well as options from third-party providers.
Some advisors have found that separately managed accounts (SMAs) offer some unique attributes relative to traditional investment vehicles. Some of these include providing additional strategy diversification, higher transparency of underlying portfolio securities, as well as better control over tax management. An important benefit for some clients is customization, which, based on the strategy, can give advisors/clients more granular control over sectors or stocks owned. This can apply to holdings that are to be included, or perhaps more commonly, excluded. This is done for a variety of reasons, ranging from personal preference or avoiding overexposure to specific holdings elsewhere, such as large, concentrated ownership stakes in single-company stock.
Finding easy ‘work-around’ solutions for such positions is less possible logistically with more conventional diversified strategies. Of course, depending on the benchmark being used, altering sector or security weightings in any way from a mainstream index runs the risk of either outperformance or underperformance, sometimes for extended periods.
Aside from client-specific preferences, SMAs have unique attributes from a portfolio construction standpoint as well. In equities, the tendency toward tighter concentration has allowed a greater focus on stock selection, and the ability to better focus on ‘best ideas’ in the individual stock space. A drawback in concentration is wider tracking error, which can elevate volatility in some environments. In fixed income, SMAs have been used for a variety of unique cases as well. For higher net-worth clients with unique tax needs, municipal bond actively-managed strategies or bond ladders, specifically geared towards bonds in specific states, have allowed for low-fee options for income where fund/ETF options might be less feasible.
The definition of ‘SMA’ should be expanded to include a variety of strategies consisting of multiple securities, including more traditional mutual funds and ETFs. These include traditional asset allocation portfolios, where a wider breadth of holdings is necessary to provide a more complete portfolio than what could be available through selected single strategies alone. The combined SMA then provides financial market exposure to a variety of the world’s assets, including US large, mid, and small cap stocks, foreign developed and emerging market stocks, US government and corporate bonds, foreign developed and emerging market bonds, real estate, and commodities. Using a combination of individual vehicles creates a top-down SMA either on its own or swapped with ‘modular’ pieces using more granular individual security exposure, such as stocks or bonds as noted above.
Aside from client-specific preferences, SMAs have unique attributes from a portfolio construction standpoint as well.
This article reflects the personal opinions, viewpoints, and analyses of the author and is developed from sources believed to be providing accurate information. The information presented is not a comprehensive analysis of the topics discussed, is general in nature, is not personalized investment advice and should not be construed as a recommendation to purchase or sell any particular security or strategy. Investment advice offered through Focus Point Solutions, Inc., a registered investment adviser.
Ryan Long, CFA | Director of Investments
By Clay H. Young, CFA, Tannin Capital LLC
Warning: Watching the iconic 80’s band Talking Heads (Once in a Lifetime) official video by lead singer David Byrne may potentially prompt financial advisors to ask themselves:
“Well, how did I get here?” and then seek more independence on their existing platform, or perhaps join or even start an RIA.
Singing “same as it ever was, same as it ever was.”
After a ton of work and new responsibilities, many have found themselves still limited to the same commoditized investment options or platform menus, only with more compliance responsibilities and less time for client engagement and wondering if SMA’s may be a potential differentiator.
Utilizing SMA’s, as customizable solutions, fosters building deeper relationships as a fiduciary, through a higher standard of care, with the goal of creating better outcomes and experiences for clients.
If “Once in A Lifetime” clients are considering SMA’s, then your establishing relationships with proven SMA Managers may be a significant differentiator for your clients and your “Once in a Lifetime” business.
The SMA structure gives control to the manager to be nimble and exercise various components of portfolio/security options to meet client needs.
Separately Managed Accounts (SMAs) Considerations & Potential Benefits:
Achieve the objective of lower relative volatility and higher risk-adjusted returns.
Maximize after-tax, risk-adjusted returns based on specific client needs.
Efficiently execute institutionally priced buy/sell opportunities in changing rate and/or stressed credit environments.
Ability to alter portfolio structure tax efficiently to capitalize on total return opportunities over multiple economic and interest rate cycles.
Provide liquidity to mutual funds where short term market outflows may force inefficient selling in volatile markets.
Putting the Client First - Down to the Cusip Level
The opportunity to own individual bonds in a professionally managed SMA is a portfolio differentiator.
Why is this important?
Portfolios need to address client tax-efficiency, liquidity and risk parameters while enabling them to efficiently manage their overall balance sheet and income needs.
The only true control lever for meeting customized tax optimization, cashflow needs, liquidity and risk parameters is through an SMA. In a mutual fund/ETF, liquidity and risk are controlled by the fund and are not customized to client needs.
Mutual fund redemptions often increase during stressed markets. As redemptions increase mutual fund managers must sell more liquid bonds leaving existing shareholders subject to lower NAV due to lower portfolio liquidity – the cost of liquidity.
Own individual securities. Not subject to adverse impact of NAV pressure due to inefficient fund selling in stressed markets
Maintain control over ability to optimize tax optionality (tax-loss harvesting), customize cashflow needs, liquidity requirements, risk parameters and client directed community impact goals.
Benefit from professional management seeking to enhance after-tax, risk-adjusted returns.
Transparent knowledge of securities held in client portfolios including cost basis for tax option management
Do not have to sell in stressed markets – managers can hold bonds to maturity and manage opportunistically.
Not subject to “liquidity cost” – possible reduction in NAV as mutual funds sell liquid securities in stressed markets when redemptions rise leaving more illiquid assets in the fund.
Separately Managed Accounts are synonymous with creating more tailored solutions for clients.
©2017-2024 Tannin Capital, LLC All rights reserved. TANNIN ™ PRESERVE STRENGTHEN GROW® *Please see Appendix for important disclosures. tannin.com. The content is for Institutional educational purposes. Investing involves risk and you may incur a profit or a loss.
Level Four Capital Management is steadfast in its commitment to a well-defined investment philosophy and process. This philosophy is centered on the intrinsic value of businesses, which is assessed based on the present value of the free cash flows generated by the firm's assets, discounted at the cost of capital.
The firm also seeks out companies that generate a return on invested capital (ROIC) that exceeds this cost and therefore has the potential to increase their intrinsic value over time. By adhering to this disciplined approach, Level Four Capital Management aims to maintain a long-term perspective, minimize turnover, and cultivate a business owner's mindset. The strategy itself and the firm’s confidence in the strategy provides a behavioral advantage, enabling the firm to navigate challenging market conditions without succumbing to short-term market fluctuations. Instead, the firm leverages these periods to enhance its position, entering or increasing positions when valuations are attractive relative to the long-term intrinsic value. This approach aligns with the goals of investors seeking to integrate equity strategies into their portfolios that are grounded in a rigorous and consistent investment process.
Level Four Capital Management firmly believes they can help advisors and consultants and their clients, whether retail or institutional, meet their long-term goals and objectives. Their approach can make the initial discussion regarding the value of using SMA managers for individuals or financial advisors much easier. Consider a business owner’s journey from seizing a business opportunity, to ultimately considering a life-changing sale of his or her business. The offer is a testament to the value of dedication and strategic reinvestment. This situation is not uncommon among successful business owners who find themselves at a crossroads, contemplating the transition from running their business to planning for a secure financial future. For individuals like this, who have concentrated their wealth in their business, diversifying and ensuring a steady income post-sale are critical steps. This is where a tailored investment strategy comes into play, one that balances the need for liquidity with the desire for growth and aligns with personal goals. Business owners understand reinvestment, cash flow and valuation, therefore the Level Four Capital Management’s process is familiar and makes sense.
Another advantage of Separately Managed Accounts (SMAs), is they offer investors a personalized approach to asset management, allowing for a tailored investment strategy that aligns with individual financial goals and risk tolerance. The customization of SMAs enables investors to work closely with their advisors and managers to define the investment criteria, such as targeting specific sectors or excluding certain stocks, which can be particularly beneficial for those with unique tax considerations or ethical investment preferences. The LFCM Large Cap Growth Strategy, with its focus on long-term growth and a value-oriented approach, exemplifies the adaptability of SMAs. By emphasizing a bottom-up stock selection process and a long-term perspective, this strategy seeks to provide returns without overpaying for assets, which can be an effective complement to more momentum-driven or aggressive large cap growth strategies. This approach aims to capitalize on market opportunities while maintaining a disciplined investment process, potentially leading to favorable outcomes over time.
See Level Four Capital Management's full disclosures here
The offer is a testament to the value of dedication and strategic reinvestment.
Spencer Shelman, CFA, Portfolio Manager, Palouse Capital Management
At Palouse Capital, we spend a great deal of time assessing a company’s financials and listening to company conference calls. In doing so, we can often glean clues to help us identify situations where the consensus opinion may be mis-valuing a company’s shares.
One example, and an area where we have found success in the past, has been identifying business mix transitions, particularly those where a company is seeing outsized growth in a smaller but higher margin part of its business.
These transitions provide a positive catalyst in several ways. First, the company’s overall growth rate will improve as the faster-growing segment becomes a more significant part of the overall business. Second, the valuation may adjust as the company gains a reputation as a company levered to a faster-growing end market. These business mix transitions can often result in both higher than consensus earnings trajectories, and higher valuation.
Let’s assume we have a $1B revenue company with two reportable business segments, one of which is a legacy business accounting for 60% of revenues with 40% gross margins, growing at 2% per year. The company has long been known for the legacy business, and its shares are largely valued as such. The other segment is a newer business with higher margins and higher growth from a smaller base. Let’s assume the newer growth segment currently accounts for 40% of revenues, with 60% gross margins, and growing at 30% per year. Industry peers of the legacy business are generally valued at around 15x, while industry peers of the growth business are generally valued at around 30x.
Fast forward 3 years, and at 2%/yr., the legacy business has grown from $600M to $637M revenues and from $240M to $255M gross profit. At 30%/yr., the growth business has grown from $400M to $879M in revenues and from $240M to $527M in gross profit. Total Revenues grew by a blended 51.6% (14.9% annualized) to $1.52B, and total gross profit has grown by 96% (25% annualized) to 782M. Not bad for a company that most investors view as levered to a legacy industry with 2% growth.
Suddenly, the street calls the company a new growth darling, with nearly 60% of revenues and two-thirds of gross profit coming from a fast-growing business. Even if we assume that markets are entirely rational and efficient and use a sum-of-the-parts analysis to value the company at 15x for the legacy business and 30x for the growth business, the valuation would adjust from about 22.5x PE today to a 25x PE. But keep in mind that markets aren’t always rational, and you may see valuation begin to move even higher. Either way, the business mix transition drove a significant gain in profitability and surely caught the attention of investors.
Identifying opportunities such as this is usually more complex than the example above, and generally involves the build-out of a detailed financial model, which is paramount to the Palouse investment research process. There are often several segments with different growth trajectories and varying margin levels to sift through, but the general idea is the same. Companies re-invent themselves all the time. If you pay attention to the financials and management commentary in quarterly conference calls, you can sometimes get ahead of a significant re-rating in both profitability and valuation.
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These business mix transitions can often result in both higher than consensus earnings trajectories, and higher valuation.
For managers who want to increase access to new search opportunities, having a better understanding of the overall reporting process is key.
The input affects the output and reporting isn’t solely about the depth of information populated, but the quality of reporting as well. Challenges usually begin with internal resource constraints, a common catalyst that limits the ability of firms to complete this daunting task to the level it should be. Turnover and/or inexperienced staff unfamiliar with database structures and requirements often leads to incomplete, inconsistent, and inaccurate information. Whether one person or a team is responsible, having a proven and accountable process is essential to creating profiles that make sense.
Subpar reporting impacts visibility to searches and managers should be reporting as if everything is a screening opportunity. Databases are also an opportunity for managers to tell a compelling story. Data is a validation of a manager’s investment process, and written narratives should be supportive of that data and clearly align with how a manager defines what they do. Consultant databases are where searches start and often the precursor to receiving an actual RFP and should be completed with the same level of detail.
Profile completion rates above 90% can significantly increase visibility to search activity.
Most databases are comprised of qualitative and quantitative information, both equally important to complete – they go hand in hand.
Critical items managers need to populate, strategy applicable, that impact searches:
Performance and AUM.
Fundamental Characteristics.
Allocations – Countries, Sectors, Market Caps, Exposures, Maturity, Distribution etc.
Portfolio uploads.
Factsheets and commentary uploads.
Consistency in strategy/vehicle naming conventions across databases.
Document uploads – GIPS, ADV’s, Prospectus, insurance, and corresponding dates.
Employees – Lists of key individuals, bios, organizational charts.
Strategy guidelines and fee schedules.
Finally, and important for managers to remember, is that they are classified by the databases into a peer universe based on the information submitted. If a manager’s strategy profile does not align with the information/data provided, it could shift them into a universe where they don’t belong. Items such as market cap breakpoints, sectors, and portfolio holdings to name a few, can move a manager out of its preferred universe. To the point made above, data validates what you do and is a defining factor for universe classifications.
At IMSS, we are revolutionizing consultant database population utilizing decades of experience working with investment firms challenged with accurate reporting. With a collective of over 30 years of experience, we assist clients in creating a streamlined internal process, while expediting the flow of accurate and timely information to consultant databases. Our focus is not only on reporting, but to facilitate a deeper understanding of the impact that a manager’s population efforts have on increasing investor search activity. A manager’s focus is raising AUM and databases play a critical role in that, yet managers still fall short in meeting the requirements in reporting.
Understanding the ins and outs of reporting and creating comprehensive profiles can mean the difference between screening into searches and not out. To learn more about Data-Centrix and how we support investment firms, Contact Us and visit our website.
Critical to that end and equally important, building comprehensive profiles that are 90-100% complete is necessary for screening against a peer universe.
The phrase “socially responsible investing” has rarely been synonymous with the phrase “market-beating returns” in the minds of many investors.
But in my opinion, it doesn’t have to be.
I think one problem that hurts SRI managers is that they may do too much. Indeed, most SRI managers:
1) vet stocks for their SRI characteristics; and
2) choose the best investments from the pool of SRI stocks.
In effect, these managers are required to be experts in two vastly different areas. Vetting companies based on their SRI characteristics is virtually a full-time job. Companies have sprawling operations these days touching many different industries. And the scope of SRI investing has broadened to include faith-based investing and other SRI offshoots. It is little wonder that managers who devote their limited resources to both vetting stocks for SRI qualities and choosing what they believe are the best investments are possibly over-extending themselves and potentially dooming their strategies to mediocre returns.
In our opinion, a different and better approach is to let firms do what they do best. That is our philosophy at Horizon Investment Services when it comes to socially responsible investing — let experts on vetting companies do the “social screening” for Environmental, Social, and Governance (ESG), or faith-based characteristics; and let experts on stock screening and selection focus on the investment side of the equation.
In each of our SRI and faith-based strategies, Horizon does not do vetting of stocks based on SRI/BRI characteristics. We leave that to the experts at MSCI and ISS Governance. We focus on the investment side by taking SRI/BRI indexes or universes created by MSCI and ISS Governance and “enhancing” them using Horizon’s proprietary Quadrix® quantitative stock-rating system.
Quadrix ranks more than 3,000 stocks based on more than 90 different variables for each stock. A stock’s Quadrix Overall score is determined by the individual scores of seven categories — Financial Strength, Value, Quality, Momentum, Earnings Estimates, Performance, and Reversion. Quadrix scores are percentile rankings (0-100). For example, a stock with an Overall score of 97 means that the stock scores better than 97% of all stocks in the Quadrix universe.
We believe a numerical ranking system like Quadrix can provide a strong investment overlay that can be applied to an SRI/BRI index to enhance the index performance.
Our rules-based “enhanced index” investment process is transparent. We start with an index or universe of stocks that an expert has already vetted for their Environmental, Social, and Governance (ESG) or faith-based characteristics. We winnow down those stocks to 30-40 based on Overall Quadrix scores. Then we apply certain constraints (market-cap screen, sector constraint, equal weighting, and tactical allocation plug when appropriate) to create the final portfolio. We typically maintain that portfolio for 12 months, and then re-evaluate the portfolio by running the methodology again, rebalance/reconstitute and then hold for another 12 months.
Currently, Horizon is offering four investment strategies in the Socially or Biblically Responsible Investing space:
Enhanced Socially Responsible strategy — an all-equity enhanced index strategy that applies quantitative overlays to the MSCI KLD 400 Social Index.
Enhanced SRI Fossil Fuel Free strategy — an all-equity enhanced index strategy that
applies quantitative overlays to the MSCI KLD 400 Social Index, with additional screens that are designed to eliminate companies with exposure to fossil fuels.
Enhanced Christian Values strategy — an all-equity enhanced index strategy that applies quantitative overlays to the MSCI USA Catholic Values Index.
Enhanced BRI strategy — an all-equity enhanced index strategy that applies quantitative overlays to a universe of stocks already screened and vetted for BRI principles by ISS Governance.
For more information about Horizon, Quadrix, or any of our strategies please visit our website at www.HorizonInvestment.com or call us at 800-711-7969.
When it comes to socially responsible investing — let experts on vetting companies do the “social screening” for Environmental, Social, and Governance (ESG)
By David Yucius, CFA- President
The age-old trade-off between growth stocks and value stocks have tended to divide investors into two camps- Growth investors or Value investors. Imagine blending both, a Growth At a Reasonable Price (GARP) approach.
Growth Stocks are stocks of companies that have historically been able to grow their businesses faster than the average company, and are expected to continue that growth into the future. Because of the hopes for improved future earnings, these stocks tend to sell at expensive valuations increasing risk.
Value Stocks are stocks of companies that typically have run into some sort of trouble leading to a falling stock price.
Growth-At-a-Reasonable-Price (GARP) investors try to take the best traits of growth stocks, AND the best traits of value stocks simultaneously to create a “best of the best” mixture.
The beauty and the outcome of a disciplined Growth At a Reasonable Price (GARP) approach is a portfolio of Growth advantaged companies, with Value stock price characteristics. This allows the portfolio to capture the better elements of each and minimize the volatility of placing more direct style bets. Fundamentally a GARP portfolio will enjoy higher sales growth, higher Return On Invested Capital, higher EPS growth, etcetera. Stylistically, a GARP portfolio will have the volatility and risk reduced effects of lower P/E ratios, lower Price/EBITDA ratios and other price risks.
Aurora Investment Counsel has been practicing its disciplined Growth-At-a-Reasonable-Price approach for 30 years. Serving RIA firms and family offices and other institutional investors typically in a sub-advisor capacity, Aurora Investment Counsel’s GARP investment philosophy is available through some of Atlanta’s best financial planners and wealth advisors.
Using separately managed accounts that are truly customized to the unique needs of each investor, Aurora clients get the benefit of a disciplined investment approach with personalized consideration for their unique needs.
Aurora strives to maintain long-term relationships throughout a full market cycle, and is firmly committed to delivering truly outstanding investment performance.
A disciplined GARP strategy delivers a healthy share of returns (remember these stocks are growing earnings faster than the market) and risk reduction (these stocks have cheaper valuations too!). If these traits are maintained over time, we can see how a GARP portfolio offers the allure of a smoother ride while providing above normal long-term returns.
GARP is not a get rich quick scheme. The benefits of Aurora’s long term focus and discipline becomes apparent with a rare accomplishment- Aurora’s Equity Carve Out strategy composite performance has delivered a Five Star Zephyr award in 2003, and also in 2023- testament to Aurora’s long-term focus and discipline as well as the benefits of a GARP approach.
As these stocks tend to have higher dividend yields and lower valuations, they deliver lower risk and potentially lower near term returns.
By: Martin LaPrade, CFA, Equity Portfolio Manager, Partner, Sawgrass Asset Management and Marc Davis, CFA, Equity Portfolio Manager, Sawgrass Asset Management
As Yogi Berra is credited as famously positing, “In theory there is no difference between theory and practice, in practice there is.” Investment professionals are trained on the textbook theories of investing but eventually learn the market’s harsh reality that these theories can fail to explain the market and stock movements in short to intermediate time periods.
These approaches have been, and always will be, affected by human behavior and the errors and biases that cloud investor judgment. The inefficiencies caused by investor behavior lead to periods of crowding and overreactions in both bull and bear markets. Multiple instances in market history demonstrate this pattern. While much of investment textbook theories work over the longer-term, the path to understanding the fundamentals producing the return patterns can be fraught with seemingly illogical turns.
Textbook investment theory would suggest that higher returns are a function of taking more risk, and higher risk, higher beta stocks should outperform in up markets to compensate for the extra risk assumed by investors. Accordingly, lower risk, lower beta stocks should offer lower returns given the lower risk taken on by investors. However, one of the most striking longer-term anomalies that seems to confound the textbook theory underpinning long-term bull markets is the notion that lower risk stocks have outperformed higher risk stocks. The textbook investment premise supports that in a longer-term bull market, higher risk stocks should have outperformed on an absolute basis and lower risk stocks should have underperformed. What is missed in the return equation is the path markets take to the longer-term average and the effects it can have on investing outcomes. Real world results suggest that theory may have things backwards.
Longer-term studies demonstrate the highest risk stocks have underperformed the markets on average while lower risk stocks have outperformed. While higher beta and higher risk stocks can provide spectacular outperformance in short periods of time and garner much fanfare and fascination from the investing public, their inability to hold onto those gains in tougher market periods is the performance cycle component that is often overlooked in the longer story when investors are studying actual earned returns. The path to the longer-term returns is a critically important determinant of realized returns, not just the performance in short-term bursts to the upside.
The behavioral side of this anomaly makes sense as investors, like moths drawn to the flame, inevitably gravitate to riskier stocks during long bull markets. However, what sometimes can seem to be investment savvy decisions can instead easily be a function of being lucky to have a higher concentration of riskier stocks in a period that rewards this approach. The more dramatic the short-term market returns, the more likely an investor’s 3-5-year returns can be above other less risky managers. This outperformance will likely attract investor attention and result in positive flows. However, seasons change and failure to lower the risk of this portfolio will cause the longer-term returns to suffer during drawdown periods. Given the greater asymmetrical effect of negative returns on the geometric linking used in the calculation of performance, higher participation in market losses can cause more damage to longer-term returns than not catching as much of the upside but protecting better on the downside.
Sawgrass Asset Management, L.L.C. is a 100 percent employee-owned, registered investment advisor based in Ponte Vedra Beach, Florida. We provide active equity and fixed income investment management services to institutional investors, and our products include large and small cap growth equity portfolios, large value, as well as core, intermediate and short-term fixed income portfolios. Visit Saw-grass.com to learn more.
Stock markets are directed by humans, or programmed strategies implemented and created by humans, through fundamental or quantitative approaches.
