Background on SMAs and IMAs

Separately Managed Accounts (SMAs) and Individually Managed Accounts (IMAs) — Our industry loves jargon and acronyms, and these two come across my desk every day.

In short IMAs are a tailored investment management service and the industry name for the service PPM provides, while SMAs are a funds management services aimed primarily at moderate sized investors wanting an alternative to managed funds.

Both forms of managed accounts offer investors a professionally managed direct share portfolio and provide transparency while avoiding the tax distortions that come with pooled investment vehicles such as managed funds.

However, there are some important differences between individually and separately managed accounts and while they may sound similar, these differences can have a significant effect on investment performance, suitability, and tax effectiveness.

Generally, Separately Managed Accounts are a good alternative to managed funds for many investors, but for those with $1 million or more, the benefits of an IMA become compelling.

Differences between Separately Managed Accounts (SMAs) and Individually Managed Accounts (IMAs)

The key difference between Individually and separately managed accounts lies in their different approach to building an investment portfolio. SMAs are constructed on a model portfolio basis where each investor receives exactly the same portfolio, based on a master portfolio assembled by the fund manager. IMAs however, are constructed individually for each investor, although each account shares some common holdings. These two approaches have important differences worth highlighting:

• New investors in a SMA may buy stocks that have already enjoyed most of their returns, but remain in the model portfolio to avoid realising capital gains tax. IMA investors however will receive a portfolio that is assembled incrementally, as attractive opportunities develop.

• Similarly, new investors in Separately Managed Accounts will receive a larger holdings in stocks that have already performed well, while IMA investors are likely to receive larger holdings in stocks the investment manager believes will perform well in the future.

• IMAs also provide the ability to tailor the portfolio to the investors tax circumstances. For instance, a good IMA manager may place more weight on generating franked dividends for a SMSF, while long term capital appreciation is more valuable for a higher marginal tax rate account.

These differences in investment management are an effort to produce the best after tax result for each investor. As every investor in a SMA will receive the same portfolio, the Separately Managed Account manager can not consider individual tax consequences or other individual considerations when making investment decisions.

• Both structures will allow you to transfer an existing share portfolio, with the IMA structure providing some additional flexibility and tax advantages. When importing an existing portfolio into a SMA, only those shares contained in the model portfolio will be retained and only to the proportion the transferred shares are held in the model portfolio. This means new investors may still realise substantial capital gains when entering an SMA. Conversely, a diligent IMA manager will migrate the existing portfolio over time and with consideration to the tax consequences of any sales.

• If the investor provides instructions to exclude any particular stocks or sectors, an Individually Managed Account manager will hold alternative positions, while an SMA investor will generally hold additional cash in lieu of the excluded positions. Of course, this can have a significant impact on the portfolios overall performance.

Other important differences include the service levels received by the investor and their investment managers execution strategy.

Separately Managed Account investors generally receive a managed fund type service while Individually Managed Account investors have ongoing access to the individual responsible for managing their share portfolio and will generally receive personalised reporting and commentary about their portfolio.

When executing trades, SMA investors will generally receive at market prices on their transactions, while an IMA manager may attempt to get best execution and/or exercise discretion over the timing of buys and sells for their investors.

For additional information visit Individually Managed Accounts

Kris Vogelsong, August 2012

This data provides general information only, it does not take into account any individuals objectives, financial situations or needs. Potential investors should consider the appropriateness of any advice ot their own circumstances and seek professional advice prior to acting on any information on this page. Past performance is not necessarily indicative of future returns.