Managed accounts offer flexibility and control

SEPARATELY managed accounts are a relatively new product in Australia, but investors can expect to hear a lot more about them in the future.

SMAs, also known as individually managed accounts, are designed to combine the benefits of direct share investing with the best aspects of managed funds.

They have experienced rapid growth in the US, spawning pre-dictions that 25 per cent of all US investors will be using SMAs by 2005.

Sydney company DirectPortfolio was the pioneer of SMAs in Australia.

DirectPortfolio has been offering SMAs since 1996 and currently manages approximately $200 million. It has just released a new prospectus offering clients eight different investment portfolios.

ASGARD, best known for its master trust administration service, is the latest company to enter the fray.

SMAs are ideal for individuals who want a share portfolio to be actively managed and administered by professionals.

In other words, they want a professional to structure and manage their portfolio, take care of the paperwork and calculate capital gains.

Both SMAs and managed funds offer these benefits.

The key difference is that investors using SMAs retain ownership of their shares, whereas investors using managed funds own units in a ‘pool’.

This makes SMAs more transparent – individuals can see each transaction made on their behalf by the investment manager.

It also delivers significant flexibility and tax benefits. For instance, individuals can transfer existing shares to an SMA without crystallising capital gains.

Similarly, individuals can exit their account without having to sell the underlying shares.

SMAs also give investors the ability to crystallise capital gains or losses to suit their individual circumstances.

This degree of control is simply not possible with managed funds.

ASGARD and DirectPortfolio offer SMA clients two very different approaches to investment management.

DirectPortfolio manages all money in-house and gives clients a choice of eight different mandates.

These cover a range of risk and reward scenarios, to suit different investors (see story below).

In contrast, ASGARD has appointed five external investment managers – Credit Suisse, JBWere, Deutsche, Merrill Lynch and Citigroup.

Each firm will actively manage a portfolio of between 15 and 30 stocks, selected from the top 300 stocks listed on the ASX.

The minimum investment in SMAs is substantially higher than for managed funds. DirectPortfolio has a minimum of $50,000, while ASGARD has a minimum of $100,000.

The fees charged by SMAs are comparable to those charged by managed funds.

For instance, DirectPortfolio charges an accounting fee of $1,500 per investment mandate, equivalent to a 3 per cent entry fee on $50,000.

Ongoing management costs are capped at 1.9 per cent, although this does not include brokerage and other transaction costs.

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