Firm
Insights
High-net-worth (HNW) individuals who have made mutual funds a key part of their portfolios may be able to find different investment traction in separately managed accounts (SMAs).
For engaged investors, SMAs can provide greater control, flexibility, and tax advantages.
Mutual funds have been a bedrock of portfolios for ease of entry due to a low minimum investment threshold and diversification benefits, among other reasons. Investors’ money purchases a pool of securities, and each investor owns shares of the fund rather than owning a security within the fund. However, mutual funds’ one-size-fits-all approach can limit handling individual constraints and individualized tax considerations, and the distribution of capital gains from pooled assets to all shareholders could present some investors with an unexpected taxable event.
An SMA is unique because investors directly own the securities within the fund. Each fund is customizable and actively managed by the account provider and is kept separate from others. Multiple SMAs can be created with varying investment styles, asset classes and levels of risk, and then used to play separate roles within a diversified portfolio. With guidance from a financial professional, investors can tune their portfolio diversification, tax, and risk with SMAs.
The rise of SMAs reflects the limitations of other investments and random management that may not fit investors’ unique needs and goals.
Assets under management (AUM) in SMAs have grown by 30% over the past two years to $2.4 trillion in 2024, according to Cerulli Associates (Cerulli). That number could grow to $3.6 trillion by the end of 2027, Cerulli estimates.
Tailored to Investor’s Unique NeedsSMAs may be ideal in situations that require personalized and customized solutions because of features like:
Specific investment objectives based on risk tolerance, financial goals, tax planning, and preference or avoidance of specific strategies or sectors (e.g., ESG, tobacco, firearms, credit quality).
Providing access to institutional-level strategies typically not available in standard retail mutual funds.
Greater control over trading and rebalancing
Tax AdvantagesFor HNW individuals in higher tax brackets, potentially reducing tax liability is ever-present in financial planning. SMAs can offer greater control over tax strategies through 1) tax-loss harvesting to offset capital gains, 2) minimizing capital gains distributions, 3) deferring gains by choosing when to sell specific securities, and 4) the ability to donate appreciated securities to charity for tax benefits.
As an example, say an investor buys into a mutual fund in October after a strong performance by the fund since the start of the year. If performance cools in the remaining months, the investor could experience a tax liability for the months where they did not own the fund and without realizing those gains.
SMA investors, though, generally avoid capital gains generated prior to the day they invested in the portfolio.
Tax-loss harvesting comes into play in the ability to offset potential capital gains by also selling a security that has declined in value. Balance in the SMA can be maintained by reinvesting the proceeds back into the account.
Lower FeesFees may vary due to level of customization and other factors but generally are lower for SMAs, which often charge trading fees and a percentage of AUM instead of mutual fund-style expense ratios and potential layers of miscellaneous expenses.
Estate and Legacy PlanningHNW investors often have nuanced estate planning needs, and SMAs can allow for better transition of assets to heirs, customized trust structures, and strategic gifting of investments.
Consider the OptionsInvestors benefit when evaluating the differences among investment vehicles to determine which option best fits their needs. The outcome should generally be a well-diversified portfolio.
Uppermost in mind, though, often is a portfolio constructed for risk-adjusted performance potential and tax efficiency. Allocation on a tax-advantaged basis adds value, and AMG National Trust Bank’s (AMG) approach is to manage strategies with tax advantages is mind. Additional tax-advantaged options are available through AMG’s comprehensive solutions that include investment management and tax services.
DISCLAIMER: This information is for general information use only. It is not tailored to any specific situation, is not intended to be investment, tax, financial, legal, or other advice and should not be relied on as such. AMG’s opinions are subject to change without notice, and this report may not be updated to reflect changes in opinion. Forecasts, estimates, and certain other information contained herein are based on proprietary research and should not be considered investment advice or a recommendation to buy, sell or hold any particular security, strategy, or investment product.
What is behind the “twins” cap-weighted S&P 500 versus the equal-weighted S&P 500?
The difference highlights some of the concerns today around correlation and concentration, not seen since the dot.com bubble. Can separately managed accounts (SMAs) be the answer?
The so-called "Magnificent 7” Microsoft, Nvidia, Apple, Amazon, Meta, Google, and Broadcom - should be seen as a big flashing light rather than the superheroes of the markets. Why isn’t anyone asking, “how it is that the market today has been defined by just seven names?” This answer comes to us as we try to understand what is today, a striking difference between two things, the S&P 500 equal-weighted and S&P cap-weighted (known as the S&P500). In fact, cap-weighted indices are the norm, as nearly every market, sector and style index is cap-weighted.
In the S&P 500 equal-weighted index, each stock holds an equal share, providing broad and balanced exposure across the entire market.
In the S&P 500 cap-weighted index, the same 500 companies are included, but their weightings are determined by market capitalization—calculated as shares outstanding × share price.Understanding Active Risk and Correlation in the S&P 500’s “Twin Indices”
Our analysis shows 100% of the Active Risk between the two “twin indices” are from the Mag-7. The Tracking Error (expected performance difference) between the two indices is approximately 6%, which means that 68% of the time, in any one-year performance difference between the two could be ±6%, and 95% of the time between ±12%. On rare occasions the difference could be more than ±18%, assuming normal distribution of returns.
Breaking Down Active Risk: Size vs. Style
The 6% Active Risk is split between:
Size (50%): The impact of cap-weighting, amplifying the influence of the Mega Mag-7.
Style (50%): The big tilt toward growth over value.
This is where “correlation” comes in to the analysis. The definition of correlation is
The mutual relationship or connection between things' or here specifically, stocks. In stock portfolios, high correlation is the opposite of diversification, or what we call concentration.
To revisit, what we looked at earlier, is despite the 500 identical names, the cap-weighted methodology of portfolio construction has created a measurable correlation between the largest companies in the Index. Quite directly, cap-weighting is a “momentum” strategy that “owns” more of what does well in price return by giving it a bigger weight.
Yup, that’s right, own more of what goes up. Buy high and hope for higher and then buy more!
Below, we present a correlation matrix for the Mag-7. The matrix illustrates that the Magnificent Seven—collectively accounting for over 30% of the S&P 500 Index—are, by definition, moderately to strongly positively correlated!
Contrast that with seven random index names shows that the correlation between these names is lower. Much lower! And that is the power and free benefit of diversification. Worse now for the S&P Cap weighted, which in extreme corrections, the Mag 7 names will exhibit even higher correlation as risk assets move as one during market downturns, like the Great Financial Crisis and recently the COVID-19 Crash.
The SMA Advantage: A more balanced approach
Cap-weighted indices are not inherently flawed except that, more often than not, companies that do well may have a connection or relationship that drives their shared success.
Quite obviously in the Mag-7, the similarities in technology, innovation, business models, clients, etc have moved them all to new highs. Must I go on? Imagine your favorite food and you being forced to eat more and the more you eat the more you are required to eat, and so on. Clearly, too much of a good thing can eventually be a bad thing.
SMA managers have the ability to create equal weighted portfolios that balance out the concentration seen in the cap weighted indices. Importantly, portfolio construction flexibility allows for individual stock selection and weighting adjustments based on market conditions, whereas a cap-weighted passive index operates as a binary buy or sell. All or none of the Mag-7. It just might be the time to swap out one twin for the other.
As investors increasingly turn to separately managed accounts (SMAs) to achieve customization and flexibility, integrating quantitative models into portfolio management is reshaping the industry. Quantitative approaches, grounded in data-driven insights and advanced analytics, offer opportunities to enhance portfolio performance while maintaining alignment with client-specific goals. In 2025 and beyond, leveraging these models will be critical for investment managers seeking to provide smarter, more effective solutions.
THE POWER OF DATA IN DECISION-MAKING
Quantitative models rely on vast datasets to uncover patterns and trends that human intuition might overlook. By analyzing historical performance, market behavior, and macroeconomic factors, these models can generate actionable insights. For SMAs, this means creating portfolios that are not only tailored to individual client objectives but also optimized for risk and return. With the growing availability of real-time data and machine learning capabilities, the precision and adaptability of these models continue to improve.
ENHANCING CUSTOMIZATION AND EFFICIENCY
Customization is at the core of SMAs, and quantitative models enable investment managers to tailor portfolios with remarkable specificity. Whether addressing client preferences, tax optimization, or risk tolerance, these models can incorporate multiple constraints and objectives simultaneously. For example, Ativo Capital uses models to identify securities that meet a client’s environmental criteria while ensuring adherence to diversification and liquidity thresholds. This level of customization enhances client satisfaction and retention. Efficiency is another critical benefit. Traditional portfolio construction methods can be time-intensive, particularly when dealing with complex client requirements. Quantitative models streamline the process by automating key aspects of analysis and allocation. This not only saves time but also reduces the potential for human error, resulting in more consistent outcomes.
MITIGATING RISK THROUGH ADVANCED ANALYTICS
Risk management is a cornerstone of successful portfolio management, and quantitative models excel in this area. By analyzing historical volatility, correlation patterns, and scenario simulations, these models help managers anticipate potential risks and adjust portfolios proactively. For example, during heightened market uncertainty, a quantitative approach can dynamically rebalance a portfolio to maintain desired risk levels while capitalizing on opportunities. Quantitative models can also incorporate stress testing to evaluate how portfolios might perform under various adverse scenarios. This capability is particularly valuable for SMAs, where clients often demand greater transparency and accountability in how their assets are managed.
THE HUMAN TOUCH: BALANCING QUANTITATIVE AND QUALITATIVE INSIGHTS
While the benefits of quantitative models are undeniable, their effectiveness is maximized when paired with human judgment. Ativo Capital emphasizes the importance of blending quantitative precision with qualitative expertise. Investment professionals play a vital role in interpreting model outputs, contextualizing recommendations, and communicating strategies to clients. This ensures that portfolios align with both numerical objectives and broader client values.
LOOKING AHEAD: THE FUTURE OF QUANTITATIVE SMAS
As technology advances, the potential applications of quantitative models in SMAs will expand. Artificial intelligence and machine learning enable more sophisticated pattern recognition and predictive analytics. These tools promise to further enhance customization, efficiency, and risk management, solidifying the role of quantitative strategies as a cornerstone of SMA innovation. For investment managers, the challenge lies in staying ahead of the curve by adopting and integrating these tools effectively. Those who succeed will be well-positioned to deliver smarter, more tailored solutions that meet the evolving needs of their clients. In conclusion, quantitative models are not merely tools for optimization; they are enablers of innovation and customization in SMAs. By harnessing their power, firms like Ativo Capital can build portfolios as intelligent as they are individualized, setting a new standard for the industry.
While we disclosed the many benefits of use of quantitative models, they do come with risks and limitations that you should be aware of. The financial markets are influenced by a wide range of factors, including economic conditions, geopolitical events, and investor sentiment, many of which cannot be predicted or fully incorporated into quantitative models. The accuracy of quantitative models heavily relies on the quality of the data used for analysis. Incomplete, incorrect, or biased data can significantly affect model outputs, leading to inaccurate predictions and suboptimal investment decisions. The models used in our firm’s strategy are only as good as the assumptions and algorithms on which they are based. Any flaw in the model design, incorrect assumptions, or errors in the algorithm could lead to significant financial losses. There is no guarantee that the model will always perform as expected.
Assuming that ALL value or growth managers are the same could lead to over or underestimating a manager’s true skill. For example, not all value managers construct their portfolios in the same manner. Some value managers look for a deep discount on the stock’s intrinsic value, while others look for valuation gaps relative to a company’s peer group. Within those approaches, there are additional nuances that managers employ. Therefore, if we use a broad-based benchmark such as the Russell 1000 Value Index to measure both managers against, depending on the measuring period ending date, the analysis could lead to an inaccurate assessment of true manager skill.
Using factor-replicated benchmarks or clones, as employed by Aapryl, offers a more accurate and insightful method for evaluating investment performance compared to standard benchmarks. This approach addresses key limitations of traditional benchmarks by tailoring the evaluation framework to the specific characteristics of a portfolio or manager's style.
Here’s Why This Methodology Is Superior: Precision in Benchmarking
Standard benchmarks often fail to capture the unique style or strategy of an investment manager. They are typically too generic and may not align with the actual risk factors or exposures driving a portfolio's returns. Aapryl's factorreplicated benchmarks, created through returns-based analysis (RBSA), resolve this by constructing clone portfolios that mimic the manager's style using a regression of historical returns against relevant factors like value, growth, or dividend yield. This ensures that comparisons are made against a benchmark that closely reflects the manager's true investment approach.
Applying the Aapryl cloning methodology to the example above, you will not only find that the benchmark is very different than the two value managers, but the two value managers are also very different from each other even though they fit within the same “style bucket”.
The Russell 1000 Value Index (Figure 1) has an 18% exposure to the value factor, while quality as expressed by both yield and low volatility factors represent 68% with the residual exposure in the economic sensitivity factor. In comparison to the aggressive value (deep value) manager (Figure 2) in the example above, the value factor exposure is much more significant at 61%, while the exposure of the relative value manager (Figure 3) is lower than that of the Russell 1000 Value Index at 12%.
Decomposing True Alpha
Traditional alpha measures—defined as the excess return over a broad benchmark—often conflate skill with style-based returns. Factor-replicated benchmarks strip away returns attributable to style exposures, isolating the portion of performance driven purely by active management decisions. This decomposition allows for a more accurate assessment of "true alpha,” offering investors deeper insights into a manager’s skill and decision-making quality.
Using the Aapryl cloning methodology, we can now determine how much of the manager’s alpha (outperformance) was related to their style bias (investment philosophy DNA – how they constructed their portfolio) versus true manager skill (manager return minus manager’s static clone return). In Figure 4, you will see that both managers outperformed their respective broad benchmark (Russell 1000 Value Index). However, in the case of the relative value manager, 2.83% of the manager’s outperformance was attributed to their style not their manager skill. In fact, when adjusting the manager’s excess performance (excluding their style effect +2.83%), the manager’s true skill, in this case lack of skill resulted in 1.37% negative alpha (manager skill). On the other hand, the deep value manager outperformed both their broad benchmark and static clone by 2.52% and 1.02%, respectively.
In conclusion, using the Aapryl cloning methodology to measure a manager’s true skill (manager alpha) provided a more precise measure when comparing managers by adjusting the manager’s style effect (manager style bias) and avoiding over or under calculating a manager’s true skill.
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.
By Kim Ryan, CFA
The tide may be turning for Value investors. Over the last fifteen years, low interest rates, muted inflation, moderate GDP growth, and Tech dominance favored Growth. Today, elevated interest rates and inflation concerns persist, and starting valuations are well above long-term averages, leaving less room for re-rating. Yet pockets of value remain, with a widening gap between Growth and Value. Against this backdrop, the conditions are favorable for active Value investors to shine.
When Value Ruled
After the Tech bubble burst in 2001, Value reigned until the Great Financial Crisis (GFC). For the last decade, however, Growth was the dominant force in US markets as the information economy accelerated technology-led productivity gains and high free cash flow-generating, asset-light business models. Today, many market participants only know a market driven by Growth.
While Value and Growth often trade leadership over short periods, patience historically rewards the Value investor. Over 10-year rolling periods, Value stocks underperformed Growth for a prolonged period only three times during the last 90 years: the Great Depression, the Tech bubble, and post-GFC. The past decade is an anomaly, with the Russell 1000 Growth Index beating the Russell 1000 Value Index by ~240 percentage points per year—a result heavily influenced by the “Magnificent Seven,” which contributed over 40% of the Russell 1000 Growth Index return during this period.[1]
Economic Conditions Look Favorable for Value
Today, conditions are notably different. The U.S. economy is outpacing other developed nations with expected real GDP growth of ~ 2%. Long-term interest rates are higher. The 10-year Treasury yield is above 4% compared to the 15-year average of 2.4%, an environment that tends to favor Value (see Figure 1).
Although inflation has moderated from its 2022 highs, it remains above the Federal Reserve’s long-term target. If inflation is unacceptably high, the Fed may reverse its stance of monetary easing, further anchoring long-term yields.
Rising government deficits tend to stimulate economic activity, particularly in areas tied to infrastructure spending, consumer demand, industrial output, and lending. Such spending boosts domestic and cyclical industries often prominent in Value indices.
“Price is what you pay; value is what you get.”[2]
There is a misperception that Value investing means owning cheap stocks. However, value investing is not just about price. It is also about the value you receive.
The U.S. stock market multiple is higher than most of its history. The S&P 500 Index currently trades at over 22x forward earnings compared with the 20-year average of 16x. When the multiple is this high, future returns trend lower, favoring less expensive stocks that tend to fall under Value.
The long-term valuation discount for Value stocks is ~30% compared to Growth. Today, the discount is 40%. The absolute valuation spread is more than two standard deviations above the long-term average. Wide spreads like these have historically resulted in Value stock outperformance over the ensuing five-year period.[3]
These high valuations come while earnings expectations are elevated rather than cyclically depressed. Consensus estimates assume sales and earnings growth will accelerate, leaving less room for revisions to normalize valuations. This setup creates a compelling case for active management and Value strategies.
Creating Value Through Sustainability
Sustainability analysis is a differentiator providing information beyond traditional financial metrics. It adds insights into management quality, strategic positioning, operational efficiency, and risk exposure. Successful sustainability management results in a future-prepared company that can respond to shifts in consumer preference, increase pricing power, reduce costs, retain talent, grow brand value, and innovate through technological or regulatory change.
This source of value-add is relevant because Value managers tend to disregard it. Of the 1,800+ active US value funds tracked by Morningstar, only about one-fifth receive a high sustainability score compared to almost one-third of all equity funds.[4]
The evidence in favor of Value is adding up. The valuation discount compared to Growth is well above the historical average, a harbinger of Value outperformance. US fiscal and monetary policy is expansionary, which could buoy interest rates. As rates remain elevated and inflation persists, Value names become increasingly attractive. Altogether, today’s economic landscape presents historically favorable conditions for Value. Poised and patient investors mindful of sustainability risks stand ready to reap the rewards.
Kim Ryan, CFA, is a US equities Portfolio Manager at Boston Common Asset Management
For more of Kim’s insights, please read her unabridged piece: The Time is Right for Value.
[1] As of December 31, 2024. [2] Warren Buffett. [3] The Russell 1000 Value Index has outperformed the Russell 1000 Growth Index for every 5-year period when the valuation spread has been wider than the 80th percentile. On 30 June 2024, this spread was in the 95th percentile. Staying the Course in Value Investing, Dodge & Cox, 24 July 2024. [4] https://www.morningstar.com/mm/investor/etf-fund-stock-screener
Separately Managed Accounts, also known as “SMAs”, are a popular investment option for individuals seeking greater flexibility with their investing. SMAs offer investors an actively managed solution which can be tailored to an individual’s personal investment goals and risk tolerance. They offer unique value through matching an individual’s investment preferences, as well as offering greater transparency and tax advantages. In an expanding investable universe, which becomes more complex and diverse over time, SMAs can make investors feel empowered with greater control of their financial outcome and meeting their financial goals.
What is an SMA?
An SMA is a professionally managed investment account which can be tailored to an investor’s unique financial goals, risk tolerance, and investing preferences. The investor directly owns the individual stocks, bonds, or other asset(s) in the account and can monitor these holdings and trades in real time. However, unlike Exchange Traded Funds(ETFs) or Mutual Funds(MFs) which can be purchased through an exchange, SMAs are only available through financial professionals.
Customization
Investors have different investment goals, risk tolerances, time horizons, and personal preferences which affect how they want and should have their accounts allocated. SMA managers can tailor make a portfolio to an individual’s preferences, matching their investments to their investing profile through active management. Asset allocation, investment selection, and investment restrictions are some of the customizations offered. Restrictions can include asset class, sector, industry, consumer preference, ESG, faith-based, or individual holdings.
Investment Transparency
SMAs offer higher levels of transparency into an investor’s holdings, performance, transactions, fees, and other account level data. Individuals can see firsthand which stocks, bonds, or other securities that they own in real time. These securities are held directly by the investor, rather than indirectly through an ETF or MF. Direct ownership also allows for a better understanding of how the SMA is performing. An investor can see which specific securities are performing well and which are performing poorly. Trading can also be tracked in real time to see what moves the account’s professional manager is making. Greater transparency into their holdings and knowing what they own may lead to investors being more confident in their ability to reach their financial goals.
Tax Advantages
Through an SMA, an investor has more control over their tax bill. One benefit is tax harvesting. The tax harvesting process involves selling positions to realize a taxable event. The proceeds can then be left in cash for the wash sale period or invested in comparable securities. Since an investor holds all securities directly in an SMA, these holdings can be tax harvested. While tax loss harvesting is the most popular, gains can also be harvested based on an individual’s unique tax situation. Another tax benefit, contrary to MFs, is that SMAs are not subject to embedded capital gains. Through redemption and rebalancing, a MF creates embedded capital gains which are passed along to all investors in the fund, even if you didn’t sell your shares. Through an SMA, you are only responsible for your own transactions.
Conclusion
Separately Managed Accounts are increasing in popularity and availability. Investors have access to these solutions through most investment platforms, including large wirehouses, regional broker-dealers, and registered investment advisers. When researching these solutions, it is vital to look at investment minimums, what specializations (if any) managers have, the full range of available customization options, and all fees associated with managing the SMA. Greater customization and investing in some types of securities could result in higher fees for the investor. 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. While customization may incur higher fees, the benefits of tailored solutions and tax efficiency could outweigh the costs for investors seeking a personalized wealth management strategy.
Winning Is Hard
A recent quote from tennis legend Roger Federer resonated with our investment team. Federer stated in his 2024 commencement address at Dartmouth: “In tennis, perfection is impossible... In the 1,526 singles matches I played in my career, I won almost 80% of those matches. Now, I have a question for all of you... what percentage of the points do you think I won in those matches? Only 54%.”
Winning Compounds Over Time
Winning (especially on a short-term measure of success) is hard; this is particularly true in a highly competitive arena like investing, where we acknowledge that many if not most investment managers lag the market after fees. Even one of the best tennis players in history only won 54% of his points. But consistent little wins add up. For Federer, winning 54% of his points translated into winning 58% of his games, 76% of his sets, and most importantly, 80% of his matches.
A similar phenomenon is evident in investing as well. The likelihood of outperformance for a given stock on a given day is not materially higher (or predictable) than that of a single coin flip. But most firms own many stocks and over many days. Over longer time periods, a small edge at either the stock level or portfolio level should compound into much higher (and more impressive-sounding) levels of winning.
An important distinction between tennis and investing is that tennis outcomes are binary. You either win or lose the point. It doesn’t matter if your opponent missed the line by a hair or whiffed, you still just win the point. In investing, on the other hand, magnitude is critically important. At the stock level, you might have an outperformer and an underperformer, but if the outperformer is ahead by 20% and the underperformer lags by 10%, you come out way ahead.
How You Respond Matters
A rule of thumb is that good managers pick stocks that beat the market approximately 52% of the time. Much like in the preceding tennis anecdote, this doesn’t sound particularly impressive in isolation, but when repeated over time, it would result in top-tier relative returns vs. the peer group. When thinking about what this means in practice for our team, with a 30-stock portfolio, you with have on average roughly 16 stocks that help and 14 that hurt each quarter. How you respond to that disappointment matters. When you lose a point nearly as often as you win, you need to refocus on the next point constantly and consistently. A team’s ability to learn, move forward, and continue to execute through all markets is critical.
With almost as many mistakes as successes, the behavioral aspect of investing is remarkably important to long-term success. Flipping a coin will, over time, deliver results of ½ heads and ½ tails, but that doesn’t mean heads cannot come up even ten times in a row (or more!). The discipline to consistently move on from both losers and winners and learn from them is imperative to long-term performance. As investors and portfolio managers, how we respond to the 52% wins or 48% losses is incredibly important, ensuring that our bad decisions today do not negatively impact our decisions tomorrow and our good decisions do not give us unreliable confidence.
Active management allows investors to identify those stocks that can drive long-term outperformance versus passive benchmarks.
We believe the secret to a good track record in investing is the same as in tennis - a small winning edge can compound into an outstanding record over a long enough time frame.
The opinions expressed represent the personal views of Cornerstone Investment Partners investment professionals and are based on their broad investment knowledge, experience, research and analysis. Past performance does not indicate future results. As with all investments, the possibility for profit is accompanied by the risk of loss.
Separately Managed Accounts (SMAs) have been a go-to for institutional and high-net-worth investors who want personalized investment strategies. However, as customization becomes the norm, asset managers need to improve their game — especially when it comes to data and reporting. Consultant databases (CDBs) are an opportunity for a direct line to new business.
In simple terms, if your SMA strategies are not being indexed in consultant searches, you are missing out on a substantial potential customer base. However, the silver lining is that this is something you can change. Let’s look at how asset managers can further refine their performance and strategy reporting to enhance their competitive advantage.
The Role of Transparency in SMA Growth
Transparency isn’t just a buzzword—it’s the backbone of credibility. Consultants and investors don’t just want strong returns; they want to understand how those returns happen. That means:
Timely, consistent updates – Think of consultant databases as always-on search engines for investment strategies. If your performance, holdings, and risk analytics and other key attributes aren’t updated regularly, you risk getting filtered out of searches before you even get a foot in the door.
Detailed performance attribution – Consultants want to see the story behind the numbers. Breaking down returns by sector, security selection, and risk factors helps position your strategy as thoughtful and intentional.
Data accuracy and compliance – For SMAs, regulatory nuances matter. Whether you’re following GIPS standards, or a custom methodology, consistency and clear disclosure are non-negotiable. Mistakes don’t just get flagged—they can cost you opportunities.
Customization Is an Edge—If It’s Communicated Clearly
One of the biggest draws of SMAs is flexibility. Unlike mutual funds or ETFs, SMAs give clients direct ownership of securities, which means portfolios can be tailored to specific needs, whether that’s ESG preferences, tax efficiency, or sector weightings.
However, customization is only a selling point if consultants and investors understand it. That’s where data management comes in:
Custom benchmarks and guidelines – If you offer ESG screening, tax-loss harvesting, or sector exclusions, those details should be front and center in your database profile and marketing materials. Don’t make consultants dig to understand what makes your strategy different.
Style consistency and portfolio drift monitoring – Customization doesn’t mean inconsistency. If your strategy evolves, regular reporting on sector weights, turnover, and risk factors ensures consultants see a clear and stable investment approach.
Reporting Isn’t Just Compliance—It’s Business Development
Too many asset managers see consultant database reporting as a back-office chore. The most successful firms see it as a growth strategy. Here’s what that looks like in practice:
High database completion rates – Studies show that profiles with 90%+ completion rates outperform in consultant searches. Missing qualitative fields — like investment philosophy or risk management processes—can knock you out of consideration before a human even looks at your strategy.
Storytelling through data – Your SMA strategy isn’t just a performance report; it’s a narrative. Use the qualitative fields in consultant databases to highlight what makes you different — whether it’s risk management expertise, ESG integration, or your ability to offer bespoke solutions.
Proactive data management – The best managers don’t just update databases once a quarter and forget about them. They treat consultant databases as a living part of their business development strategy — ensuring data is fresh, complete, and optimized for visibility.
The Bottom Line
Asset managers who take consultant database reporting seriously aren’t just staying compliant — they’re getting ahead. Prioritizing transparency, customization, and proactive data management ensures that consultants and clients see your value before you even step into the room.
Philip Taylor, CFA, President, FinMason
Artificial intelligence is transforming industries, financial services are no exception. From portfolio management to customer service, AI has the potential to revolutionize how financial firms operate. However, organizations face a significant obstacle: the lack of a solid foundation in data and investment analytics. Without addressing these foundational issues, AI initiatives often fail to deliver value.
Data Silo Dilemma
An investment management firm aiming to leverage AI to generate automated commentary on their investment products. Such a system would pull data from various sources, analyze it, and produce insightful commentary tailored to products. The data required to support investment commentary often resides in a separate systems. Siloed architecture leads to inefficiencies, data inconsistencies, and a fragmented view of the firm's investment universe.
Similar challenges arise for pension funds. One client of ours envisioned using AI to streamline the process of writing portfolio commentary and finding relevant news articles. This initiative was hindered by the fact that performance data, risk metrics, and private equity information were scattered across systems. For the AI to work effectively, it required seamless access to these systems, something the current infrastructure couldn't provide.
Insufficient Analytics: Financial Custodian Case
The challenges don’t stop at data silos. A prospective financial custodian wanted to use AI to provide personalized investment commentary for their clients’ portfolios. Their goal was to enhance client reporting with relevant insights tailored to each portfolio. During discussions, they realized they lacked a sufficiently broad set of investment However analytics to support this initiative.
Without key analytics such as risk attribution, style analysis, and multi-asset performance metrics, the AI system couldn’t generate meaningful or actionable commentary. The custodian concluded that before implementing AI, they first needed to expand their investment analytics capabilities. Only then could they provide the AI a rich enough dataset to work from and deliver insightful portfolio commentary.
Solving the Data and Analytics Problem Is Critical
To unlock the full potential of AI, a comprehensive data and analytics strategy is needed. This requires addressing key dimensions:
Automation for Reliability and Key-Man Risk ReductionFinancial firms often rely on manual data aggregation processes, which are prone to human error and inefficiency. Automating these processes ensures that data is accurate and reduces the risk of dependency on individuals.
Integrated Systems for Seamless OperationsTo fully leverage AI, data must flow seamlessly between different systems. An integrated approach allows firms to break down silos, enabling comprehensive reporting, ad-hoc analysis, and robust AI capabilities.
Data Validation for Consistency and ReliabilityAI systems are only as good as the data they consume. If the input data is inconsistent/inaccurate, the outputs will be flawed. Incorporating rigorous data validation processes ensures data is dependable and actionable.
Auditability for Strong Data GovernanceFirms must ensure that their data processes are auditable. When AI-driven insights are used to make investment decisions, a robust audit trail provides transparency and accountability, helping firms maintain trust from stakeholders to regulators.
Flexibility for Future GrowthThe financial landscape is constantly evolving, with new data sources and service providers emerging regularly. Flexible data architecture allows firms to easily incorporate new inputs, ensuring that their AI capabilities remain innovative.
Broader Investment Analytics for Richer InsightsAs seen in the case of the financial custodian, having a robust and comprehensive set of investment analytics is crucial. Without this, AI systems lack the depth required to generate high-quality insights.
Building the Foundation
Solving the data and investment analytics problem is not a one-time project; it is an ongoing journey. Firms should think strategically on data architecture, ensuring it is robust to support needs while remaining adaptable for future advancements.
FinMason has seen firsthand how addressing these foundational issues can unlock the potential of AI. By implementing a comprehensive data strategy, our clients have been able to achieve greater efficiency, deeper insights and better outcomes for their stakeholders.
AI promises to revolutionize finance, but it cannot succeed without the right data infrastructure and investment analytics. Firms must prioritize solving these foundational challenges before embarking on ambitious AI projects. By doing so, they will maximize the AI investment value and build a more resilient, future-ready organization.
By Chuck Carlson, CFA CEO, Horizon Investment Services
If you and your clients are concerned about market risk this year – and you should be -- it’s probably worth having a refresher on diversification. I think there are at least five useful forms of diversification.
Diversification across asset classes
Diversification across asset classes is probably the most popular form of diversification. Stocks versus bonds versus crypto versus gold versus ostrich farms versus collectibles versus art, etc. In short, you are owning asset classes that, hopefully, are not 100% correlated with each other. Th us, when one asset class is tanking, your chances increase of owning an asset class that is doing well.
Diversification within asset classes
Th s form of diversification focuses on an individual asset class. For example, within equities, you own large cap, small cap, midcap, international, growth, value, sectors, etc. In bonds, you might own short term, intermediate term, and long-term bonds, corporates and treasuries, convertibles and high yield. Again, the aim is to own various investments within the same asset class that are not perfectly correlated.
Diversification across time
The third form of diversification is diversification across time. One form of time diversification is dollar-cost averaging in which individuals invest a regular amount of money in their investments over some regular interval of time, regardless of market conditions. Another form of time diversification is dividend reinvestment, which forces investors to invest on a quarterly basis. I think time diversification is an underrated form of diversification because it strips emotion from the decision-making process and eliminates that dangerous urge to market time.
Diversification across strategies
I think it is a good idea to have a core investment strategy. Having a core investment strategy builds discipline into an investment program, and that’s important. However, no investment strategy works in every market environment, which is why it is a good idea to introduce different approaches in an investment portfolio. For example, perhaps your core strategy is growth at a reasonable price. It may make sense to add another strategy at the margins, perhaps a contrarian strategy. Th e idea is to bring into a portfolio various styles and strategies that are not necessarily correlated with one another.
Diversification across money managers
Related to diversification across strategies is diversification across money managers. Money managers usually have a singular approach to investing. Some may be dividend focused. Others may be momentum managers. Still others look for deep value. Diversification across money managers should bring together a number of noncorrelated approaches that can enhance portfolio diversification.
One final point about diversification. Proper diversification doesn’t mean you must have exactly the same percentages in U.S. stocks and international stocks, or growth stocks and value stocks, or growth strategies and value strategies. It’s perfectly fi ne to have a tilt in one particular direction. But concentration – whether it is a singular focus on a type of stock or strategy – will boost the risk profile of your portfolio.
Diversification has been called “the only free lunch” in investing for a reason. Controlling risk via proper diversification will go a long way to keeping you and your clients in the game and, therefore, maximizing the power of time in an investment program.
Formed in 1997, Horizon Investment Services, LLC (“Horizon”) is a registered investment adviser with the United States Securities and Exchange Commission in accordance with the Investment Advisers Act of 1940 and is located just outside of Chicago — in Hammond, Indiana. As a fiduciary adviser, Horizon is legally and ethically bound to act in the best interests of their clients. Th e fi rm offers separately managed accounts (SMAs) in a wide variety of diversified strategies for U.S. investors. Its strategies have earned 97 PSN Top Gun Awards since 2010
Investment opportunities in the equity markets are profuse, but their effective execution is what drives success. Finance has increasingly prioritized valuation proxies such as market capitalization, book to price, and other style and factor investing with an increasing emphasis on low-fee beta exposure over the last 60 years. A prevalent investment behavior is the tendency to follow the path of least resistance, allocating capital to widely favored low cost investment products. While the funds’ low fees are certainly beneficial to all participants in the investment community, low cost should not be the primary determination in allocating capital.
In the 1970s, separately managed accounts (SMAs) were developed to establish a more targeted vehicle to transfer the management of an institution or an individual’s own existing basket of securities to a professional asset manager. SMAs can hold equities, bonds, and other securities and are not one size fits all like pooled fund vehicles. SMAs have now been democratized, and participation is more accessible in individual managed or wrap accounts. SMAs have previously been used by high net worth and institutional investors but are now offered to a wider audience with lower fees and less restrictive minimum requirements. Because SMA managers have historically worked with clients holding substantial assets, SMA managers are able to easily customize client accounts and experience.
Although SMA investors forgo the board oversight of funds, they have a higher degree of portfolio transparency and a more personalized relationship with the portfolio management.
Clients can see their underlying securities and review their performances as they hold individual securities in the account rather than shares of in a fund. While SMAs are not governed by a prospectus like funds, managers, who offer SMA, are required by the SEC to provide investors with an ADV, a public disclosure brochure, to define the advisory firm, fees, services, and products. Finding SMA managers is best done on professional databases or through financial advisors, investment firms, and other professionals. Selecting a manager depends on a review of their SEC registration, ADV, investment strategies, and long term track record. The SMA manager’s size is not as important as their overall skill and discipline.
One of the important aspects of a SMA manager is the ability to construct individual portfolios. Recent research indicates that best practice in portfolio construction can be enhanced through an active approach. Embracing security analysis rather fee exposure better promotes wealth creation. Investors benefit from a portfolio constructed through a disciplined valuation process, selectively holding securities in a portfolio based on returning capital to shareholders. Although SMAs may have fewer holdings than funds, research demonstrates holding twenty to forty positions diversifies risk.
SMA managers focus on investors’ risk tolerances, values, and preferences. Risks can be addressed in meaningful ways such as position size, investment choice, and security valuation. Managers can review the relationship of holdings and are able to change positions around the margin to improve performance. This individual approach is usually favored by SMA investors, who seek the opportunity for better than market returns. With fewer securities than pooled vehicles, SMAs trading transaction costs are less frequent, saving investors trading fees and the possibility of bid/ask negative pricing spreads.
To focus on better investment choices, we believe investors need to understand their investments more thoroughly by returning to the fundamentals of each individual holding. This can be accomplished through SMAs as investment managers adhere to their unique investment philosophy and processes. By being disciplined, SMA managers can more dynamically adapt investor’s portfolios to changing markets and individual risk preferences. With so much capital chasing highly profitable Technology stocks in passive funds the last few years, many investors may not be prepared for shifts in market dynamics or able to adequately capture persistent future profits and specificity of individual Technology companies. SMA managers may be nimbler in addressing such changes.
Martin Investment Management, LLC advocates a thoughtful, knowledge-based approach to investing. We prioritize long-term wealth creation and capital preservation though portfolios in separately managed accounts. We believe that boutique SMA managers represent an underutilized resource and offer clients a more personal, flexible, and transparent choice when it comes to investing.
Why choose an SMA?
Separately Managed Accounts (SMAs) offer investors a level of customization, tax efficiency, and active management that traditional mutual funds and ETFs simply cannot match. Designed for those seeking a tax-advantaged or taxable income strategy, SMAs provide disciplined, hands-on municipal bond investments.
One of the greatest advantages of an SMA is the ability to tailor investments to align with specific financial goals. Investors can customize portfolios based on factors such as duration, credit quality, state-specific exposure, sector preferences, and bond structure. Whether an investor seeks non-callable bonds, higher-coupon securities, or a specific geographic allocation, an SMA ensures the portfolio aligns with unique financial needs and constraints.
Active Management: Seeking Opportunity, Avoiding Inefficiencies
Many municipal bond strategies rely on passive management or are too large to efficiently capitalize on market inefficiencies. SMAs can adopt a distinct strategy by actively tracking the market and executing trades only when they offer significant value. Strategies often focus on purchasing bonds at bid-side pricing and selling at offer-side pricing, ensuring cost-effective execution.
Additionally, SMAs can specialize in participating in small to mid-sized municipal issuances—an area of the market that ETFs and Mutual funds often overlook. This may provide access to attractively priced securities and can contribute to portfolio diversification.
The Significance of Proactively Managing Bonds in a Laddered Municipal Portfolio
Here are a few reasons why active management is crucial when managing SMAs.
Interest Rate Environment- In a highly volatile interest rate environment, an active approach allows for adjustments in the portfolio.
Credit Quality- monitoring the credit worthiness of issuers is important. Municipalities can face economic challenges, affecting bond ratings.
Opportunistic Purchases: Active management may identify market opportunities, such as acquiring undervalued bonds or selling overvalued ones.
Tax Considerations- If tax laws change or if your tax situation alters, adjusting the bonds in your portfolio may help optimize tax efficiency, particularly since municipal bond interest is often tax-exempt at the federal level and often at the state level.
Diversification- Regulator monitoring may help ensure that your portfolio remains diversified across different issuers, sectors, or geographic areas, reducing risk.
Boutique Manager
Boutique SMA managers often have greater flexibility than large asset managers, who must buy large bond blocks, limiting them to generic credits. By targeting small to mid-sized deals in primary and secondary markets, boutique managers may uncover opportunities that offer higher yields and alpha potential, though results vary.
Additionally, investors often benefit from more direct access to portfolio managers, allowing personalized service and tailored investment strategies. Acting as an extension of RIAs, outsourced boutique SMA managers aim to enhance client engagement by offering specialized investment opportunities.
Risk Management: A Disciplined Approach
Risk management is the cornerstone of SMA investment strategies, focusing on capital preservation and long-term stability. At the portfolio level, rigorous monitoring evaluates credit quality, sector exposure, interest rate sensitivity, and overall diversification. Proprietary technology can assist in aggregating market data, risk metrics, and pricing information to provide a comprehensive view of portfolio risk and allowing for informed investment decisions. Additionally, managers should monitor compliance and risk parameters which are often reviewed pre- and post-trade to ensure alignment with investor objectives and portfolio risk tolerance.
Outsourced managers can play an important role in optimizing Separately Managed Accounts (SMAs) by leveraging active management strategies, personalized investment approaches, and disciplined risk management. Unlike larger asset managers constrained by scale, boutique managers may have more flexibility to navigate small to mid-sized municipal bond issuances, which could offer customized solutions for investors. Their ability to proactively adjust portfolios in response to changing interest rates, credit conditions, and tax considerations may ensure that investors benefit from a dynamic and tax-efficient investment strategy. Ultimately, the combination of hands-on management, flexibility, and direct investor engagement makes boutique managers an invaluable asset in the SMA landscape, helping investors achieve their unique financial objectives with precision and efficiency.
Moreover, advisors may benefit from outsourcing SMA management to an experienced, independent municipal bond manager as this can provide access to specialized expertise, support risk management efforts, and may provide access to unique investment opportunities, all while saving time and resources for broader client needs. This approach aims to enhance portfolio oversight, compliance, and client satisfaction.
For more information about One Oak Capital Management’s Fixed-Income Solutions, including Municipal Separately Managed Accounts (SMAs), please visit our website at www.oneoakcapitalmgmt.com or call us at 914-205-5821.
“The following article is provided for informational purposes only and should not be construed as investment advice or an endorsement of any particular investment or manager. Investors should be aware that results can vary significantly based on various factors, including, investment strategies, market conditions, economic trends, and individual investment decisions. The information in this communication is subject to change without notice, and One Oak Capital Management, LLC (“One Oak”) makes no representation or warranty, express or implied, regarding the information's accuracy, completeness, or reliability.”
Fixed-income investment grade bonds can be a key component of an investor’s portfolio, particularly those who seek income, principal protection and diversification—but don’t necessarily have a big appetite for risk. Fortunately, there are multiple ways to gain exposure to the bond market. For many investors, choosing the right investment isn’t necessarily about which one is better. Rather, it’s about which one is the best fit based on an investor’s unique attributes—risk tolerance, tax sensitivities, and liquidity needs, for example. The choice between a separately managed account, or SMA, and a commingled fund, namely a mutual fund or exchange-traded fund (ETF), is no different. It’s one that can have long-term return implications.
Let’s start with the basics: An SMA is a professionally managed portfolio of securities directly owned by an investor. The securities in the SMA are held in the client’s name and the assets are managed according to a specific investment guidelines.
How are SMAs different from mutual and exchange-traded funds? Mutual funds are pools of capital from many investors run by investment managers who invest in an effort to meet the fund’s objectives as a single entity. Exchange-traded funds (ETFs), like mutual funds, offer investors shares of an underlying basket of securities. However, unlike mutual funds, shares of ETFs trade on exchanges throughout the day, with the price based on the values of the underlying investments as well as supply and demand factors. Commingled funds, like mutual and exchange-traded funds, give retail investors access to well diversified and potentially sophisticated fixed-income strategies with fairly low initial investments.
Essentially, the ownership of securities is the chief difference between the investments. In a fixed-income SMA, the client owns the securities outright and decisions may be made at the individual client level. For a commingled fund, investment decisions are made at the fund level and may or may not be beneficial for each individual investor in the fund. On the surface, the difference in ownership may appear subtle but this distinction has a direct impact on how the investments may perform on behalf of clients over time.
In an SMA, clients retain ownership of the actual bonds rather than a “basket of bonds” in a commingled fund and can see their actual holdings on demand. However, a mutual fund is only required to file holdings quarterly, although most funds disclose holdings monthly with a 30-day lag.
By owning the securities, SMA investors have portable assets with greater control over their holdings. Plus, if a manager underperforms, SMA investors can hire another manager potentially without liquidating a portion or all of their holdings. Commingled fund investors, on the other hand, can’t liquidate individual positions. They can only redeem fund shares.
Additionally, an SMA of individually owned bonds allows the client to keep the fixed-income cash flow characteristics they may find attractive. Specifically, the client can retain defined maturity dates on their holdings. This structure enables the client to fine-tune cash flows and gives them the option to hold the bonds until maturity. It also allows the manager to age the stated average maturity date, unlike commingled funds, which continuously adjust the average maturity based on the fund’s stated goals. This feature can be important for investors when they’re faced with rising interest rates.
In a prolonged period of rising interest rates, defined maturity dates on bonds allow the portfolio managers to let the portfolio age down to a more conservative maturity structure through the passage of time. This aging of bonds can potentially lessen principal losses that can occur due to rising rates. In a commingled fund, individual bond redemption by the investor is not an option. The only way investors can sell their investment is to redeem shares in the fund. Unfortunately, this event can force the mutual fund manager to sell bonds in order to satisfy the need for cash. All investors in the mutual fund are impacted by this forced selling, whether they wish to sell or not.
When comparing SMAs, mutual funds, and ETFs, it’s important to note that the fee structure between these products will vary. Fees can have adverse effect on performance and it's important to understand the fee structure of the fixed-income product you're investing in. Fee information can usually be found in an investment adviser's ADV Part 2A (for SMAs) and in a fund's prospectus (for ETFs and mutual funds). These documents should be read carefully before investing.
Separately managed accounts are not available to all investors due to higher account minimums. The reason minimums are higher is that there must be sufficient capital to achieve proper portfolio diversification. A benefit of a mutual fund and ETF is that an investor can still achieve diversification without a high minimum investment.
SMA portfolio managers have the ability to align a client’s portfolio according to individual risk tolerance, tax objectives, investment guidelines and special circumstances. The transparency and the defined maturity date that an SMA offers to clients may also offer a sense of comfort in challenging market environments.
© 2025 Oppenheimer Investment Management LLC (“OIM”). All rights reserved. This presentation is intended for informational purposes only. All information provided and opinions expressed are subject to change without notice. OIM is a subsidiary of Oppenheimer Asset Management Inc. (“OAM”). OAM is an indirect wholly-owned subsidiary of Oppenheimer Holdings Inc. The OIM ADV Part 2A contains more information about fees and risks of the investment advisory programs offered by OIM. Special Risks of Fixed-Income Securities: there is a risk that the price of securities will go down as interest rates rise. Another risk of fixed- income securities is credit risk, which is the risk that an issuer of a bond will not be able to make principal and interest payments on time. Liquidity risk refers to the risk that investors won’t find an active market for a bond, potentially preventing them from buying or selling when they want and obtaining a certain price for the bond. Many investors buy bonds to hold them rather than to trade them, so the market for a particular bond or a small position in a bond may not be especially liquid and quoted prices for the same bond may differ. High-yield bonds, those rated below investment grade, are not suitable for all investors. The risk of default may increase due to changes in the issuer's credit quality. Price changes will occur as a result of changes in interest rates and available market liquidity of a bond. When appropriate, these bonds should only comprise a modest portion of a portfolio. There are no guarantees to the effectiveness of tax loss harvesting in minimizing an investor’s overall tax liabilities or to the tax results of any given transaction and the performance of an account may be negatively affected by tax gain/loss harvesting. ETF & Mutual Fund Risks: Investors should consider the investment objectives, risks, charges and expenses of an investment company carefully before investing. The prospectus contains this and other information. Before investing, please obtain a prospectus and read it carefully. AdTrax 7652180.1
Andy Janes, JD, CFA, EVP Portfolio Manager Rothschild Wealth, LLC, an independent financial advisory firm.
Separately managed accounts or SMAs, when applied properly, can provide bespoke and targeted opportunities. Embedding diversification, incorporating a business-owner's perspective into the investment process (particularly meaningful for clients who run businesses); and helping clients to focus on long-term decisions, thus reducing concerns surrounding market fluctuations.
A core-satellite approach often combines and builds active strategies around an indexed core portfolio. While the indexed core minimizes nonsystematic risk (risk associated with a specific company or industry) the satellite active investments seek higher returns with associated levels of risk. However, be cognizant of deworsification, once coined by Peter Lynch in his book, “One Up on Wall Street”, as having a portfolio having too many correlated assets resulting in worsening its risk/return profile. With as little as 4 or 5 ETFs (i.e., LCGr, LCV, multi-cap quality, small cap, and a sector fund, your clients’ accounts can end up approaching 2000 holdings with many duplicated exposures.
Fundamental SMA mandates can provide a unique way of adding differentiated diversification through actively managed, business-focused portfolios. Fundamental managers like to quip ‘Quants invest in CUSIP numbers, fundamental investors invest in companies.’ Yes and no. SMA mandates can position a portion of one’s portfolio relative to business operational exposures. Unlike the 9-Box style grid diversification (value/core/growth and large/ mid/small), focused SMA mandates can diversify across business life cycle frameworks (see chart below).
The above framework enables participation in most market environments, as well as providing the portfolio manager with incremental tools used to judge management’s effectiveness.
Incorporating a business owner’s investment perspective often helps clients remain focused on the long-term by developing an investing rather than trading mentality. Most clients recognize that it takes time to build a business and that staying with those companies that are really building their paths over time is a logical long-term strategy. Constructing a concentrated portfolio of high confidence holdings, where the manager’s focus is on the underlying operations of the companies rather than short-term market swings, seems to resonate with clients who own businesses.
The portfolio manager evaluates companies (not stocks) as a business owner, focusing on their ongoing profitability. Important in the evaluation is identifying attractive businesses with solid and active management and constructing a concentrated portfolio of these cash flow generative businesses. This approach offers the advantage of prioritizing a company's operational milestones and long-term developments rather than being heavily influenced by short-term market fluctuations or systematic risks. Specifically evaluating companies’ business management against stated objectives. While market participants tend to set pricing ‘valuations’ via behavioral swings, operationally- focused managers can dual-value the underlying companies based on cash flows as well as relative to behavioral metrics.
If aligned properly, SMAs can provide RIAs and clients with benefits of an approachable investment strategy, reduced anxiety over short-term market fluctuations, and unique diversification opportunities; advantages that are not available with funds or ETF options. While past performance doesn’t guarantee future results, consider selecting a manager that provides consistency in approach, and importantly one that has exhibited long-term results staying the course.
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. Investments contain risk any lose value. Investment advice offered through Rothschild Investments, LLC, an SEC registered investment adviser and FINRA registered broker dealer and through Rothschild Wealth, LLC, a registered investment advisor. More information can be found here: rothschildwealth.com
Ashley Arsena, CFP Senior Business Development & Client Service Officer Shaker Investments, LLC
Market volatility is an unavoidable reality for investors. While long-term returns are ultimately driven by fundamentals, short-term swings may create uncertainty —especially for those invested in higher-risk asset classes like domestic small-cap stocks. Unlike large, well-established companies, small-cap stocks tend to be more sensitive to economic cycles, interest rate changes, and investor sentiment.
For those navigating this challenging space, Separately Managed Accounts (SMAs) offer a significant advantage by providing direct ownership of securities and greater control over risk management. Unlike mutual funds or ETFs, which require investors to ride out volatility with little influence, SMAs allow for strategic decision-making, active risk management, and tax efficiency—all critical factors in a turbulent market.
1. Volatility and the Risks of Small-Cap Investing
The small-cap market presents unique opportunities, but not all companies in the space are worth investing in. The Russell 2000 Index, which tracks approximately 2,000 smaller companies, includes many businesses that are unprofitable, carry excessive debt, or lack sustainable competitive advantages.
As of the end of 2024, over 40% of Russell 2000 companies are unprofitable—a stark contrast to the large-cap S&P 500, where most companies generate consistent earnings.
Many small-cap stocks are highly sensitive to interest rate changes, as they rely more on borrowing for growth. Rising rates can significantly impact their ability to fund operations and expand.
Small-cap stocks can be highly volatile, with large price swings driven by liquidity constraints, limited analyst coverage, and investor sentiment.
For these reasons, investing in small caps requires careful security selection and active management—a challenge that SMAs are uniquely positioned to address.
2. How SMAs Provide More Control During Market Volatility
SMAs give investors direct ownership of securities, offering the flexibility to make adjustments as risks and opportunities evolve. Unlike passive funds, where investors inherit all holdings in the portfolio, SMAs allow for a more focused, hand-selected approach to investing in small-cap stocks.
Selective Exposure – Instead of passively holding an index with hundreds of risky small-cap companies, SMA investors can focus on high-quality businesses with strong fundamentals.
Tactical Adjustments – Portfolio managers can adjust weightings based on macroeconomic conditions, such as reducing exposure to rate-sensitive industries when interest rates are rising.
Avoiding Forced Selling – Mutual funds often face redemption pressures, requiring them to sell positions at inopportune times. SMA investors maintain full control over when and how they exit positions.
3. Tax Efficiency: Managing Gains and Losses in Real-Time
Another key advantage of SMAs in volatile markets is tax efficiency. During market downturns, SMA managers can strategically harvest losses to offset capital gains, helping to minimize tax burdens. In contrast, mutual funds often distribute capital gains to all shareholders—even in years when the fund has declined in value.
In a down market, an SMA investor can sell underperforming positions, harvest losses, and reinvest in stronger opportunities.
Investors can manage cost basis more effectively, choosing when to realize gains rather than receiving year-end capital gains distributions from a fund.
Small-cap stocks can offer compelling long-term growth potential, but they also come with higher volatility and risk. With many companies in this space lacking strong investment potential, careful security selection and active management are crucial for identifying quality opportunities. SMAs provide investors with greater control, customization, and tax advantages—all critical tools for navigating uncertain markets. For those investing in small caps, an SMA structure can be a powerful way to participate in the asset class while managing risk more effectively.
At Shaker Investments, our Small Cap Growth strategy is built on rigorous fundamental research, focusing on high-quality small-cap companies with strong growth potential. With decades of experience in small-cap investing, our team actively manages risk while seeking opportunities in underfollowed and overlooked companies. If you're interested in learning more about how our approach can help navigate market volatility, we’d love to start a conversation.
Disclosure: The article reflects the views of the author and are subject to change based on market or other conditions. It was developed from sources believed to be accurate and the information presented should not be construed as a recommendation to purchase or sell any particular security or strategy. For full disclosures visit: https://www.shakerinvest.com/disclosures/.
By Clay H. Young, CFA, Tannin Capital LLC
Riddle me this…. After reading the 2024 40th Anniversary PSN Informa E-book articles, what did the Firm’s leadership team say to their Financial Advisors at the 2025 planning meeting?
“We have put considerable thought into the strategic vision and direction of our Firm, and agree that ‘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’ and ‘establishing relationships with proven SMA Managers may be a significant differentiator’ for our clients, financial advisors, and our Firm."
In response, what did the Financial Advisors say to the Firm’s leadership team?
“And, HOW…”
“And, HOW…” as in they also agree, while also posing the more challenging question of “And, How… do we actually make this happen?"
Have you ever heard the age-old adage, “If it were easy, then everyone would do it”?
Therin lies the challenging truth, and one of the best ‘once in a lifetime’ opportunities to embark on your Firm’s strategic vision to meaningfully differentiate in a commoditized world of products and services, putting clients’ interests first.
Who, What, When, Where, Why, and ____?
It’s the How question that requires significant thought and effort to thoroughly understand potential fit on a variety of levels to begin executing on a Firm’s strategic vision of serving clients utilizing SMA’s.
Perspectives of “How” examples:
Clients: “Now that I have sold my business, I’m on the radar of competing firms who are offering me more customized solutions, beyond the retail product mix that I have been looking at for years. How is my current advisor going to be able to access the top managers who have the expertise, technology, and capacity to manage my SMA as a fiduciary?”
Financial Advisors: “My firm has utilized the same fund family or product mix for a long time and the narrative is easy (ex. “you’re in it for the long haul”) and my clients are saying, “I am in it for the long haul, and I was also on that same raft when it went out with the tide a couple of years ago for example, and I want something more tailored, where I have access to managers with the capabilities to sub-advise SMA’s as a fiduciary, for more bespoke risk management, tax-efficiency, and opportunities to grow during those more volatile times”.
“How are we going to respond in an actionable way to meet the evolving needs of our clients, while also positioning ourselves to gain market share?”
Firms: “With our Firms’ commitment to our strategic vision, how do we begin implementing our plan with the full commitment of our financial advisors and clients?"
Each Firm’s self-assessment of its own existing platform philosophy, strategy, design, capabilities and systems versus necessary requirements to execute on the Firm’s strategy for the future.
Custodian Level Access:
Dual Contract (Ongoing Firm level due diligence.)
Single Contract (Ongoing Due Diligence and marketing by the Custodian’s asset management group for a fee.)
TAMP’s (Turnkey Asset Management Platforms)
RIA Platforms and Broker Dealers
Investment Manager’s Technology Stack to connect, access and deliver.
Are they utilizing purpose-built software with internal and client-facing deliverables?
CIO / Research
Wealth Advisor
Operations
Compliance
Education process for FA’s and Clients
CONFIDENCE: Financial Advisors’ confidence in the process, which Clients will understand through education and communication over time, actually helps with dialogue and engagement, which gives Clients’ more confidence in FA's and the Firm.
Teach-Ins can be a great way to have everyone focused and understand how advisors and clients in different offices have been able to benefit.
Strategies: are available strategies designed to work together with the goal of better risk-adjusted after-tax (when applicable) returns?
Process: is the process designed to streamline and improve efficiency, for business continuity and compliance, so advisors are confident that bases are covered without wondering and thus have more client facing time.
Confidence in the process, can be a competitive advantage for Firms building relationships with quality SMA managers that fit their unique Firm’s needs and vision for growth. “And How!”
©2017-2025 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.
