Separately Managed Accounts

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Conquistador07

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As some of you may know, Nuveen is the top SMA sponsor. My question is pretty basic: are the financial advisors taking their clients' money and giving it to Nuveen to create a personalized 'mutual fund'?? So instead of buying xyzxx fund through a brokerage firm, are they buying all the positions (stocks or fixed) that would make up the target asset class?

For the advisor, compensation-wise, is it the same?
 
Nuveen has a couple of high quality managers in which they distribute SMAs and funds, like an outsourced marketing department, except they do own part of each manager they distribute. Advisors don't "give" Nuveen the money, they often choose which products from which managers to recommend their clients along with other third party managers. The managers then have full discretion over the accounts and buy the individual securtieis. Although the managers would probably prefer to just run SMA and institutional accounts (this is where the margins are), they tend to run a replicated mutual fund of each product for Nuveen.

Among all of their managers, they have over $150 Billion in AUM.
 
Separate Accounts vs. Mutual Funds.
a)Separately managed accounts tend to have a higher quality of portfolio managers. Institutional manager who dont care to deal with the regulatory issues of running a mutual fund.
b)Greater transparency for the client. Continous transparency instead of quarterly.
c)Ability to tax-loss sell to offset realized gains. This is a big, big deal and can increase after tax returns if done correctly and consistantly.
d)Portfolio customization through consideration of individualized constraints. Why do I want you to buy C for me when I own a ton of JPM?
e)Charitable gifting of specific securities to avoid capital gains.
 
"a)Separately managed accounts tend to have a higher quality of portfolio managers"

I find that hard to believe - can you expand on that a little?
 
SMAs also can allow you to employ a multimanager approach customized to your goals. If the managers are integrated in the model there are also tax and transaction cost efficiency advantages to be had due to overlap.

As far as high quality of port. managers? Doesn't make much sense to me: they're probably the same managers, just more of them. Thus, your diversifying your alpha sources, which could/should result in a more consistent return.
 
A LOT of seperately managed account managers do not run or subadvise mutual funds. So the general retail public does not have access to them. They do not want to deal with the regulations and marketing that go along with mutual funds (like indepenedent boards).

Find Aletheia from LA. They run large cap growth and value. Excellent returns in both up and down markets. Do they run a mutual fund?...no. The only way you can get access is through a seperate account. I can name off a dozen of these managers.

Certain managers are excellent in their particular asset class, but are marginal in others. Do you really think that Fido or American has a full line up of rock stars in each asset class? Again, the answer is NO. Instead, you can construct a portfolio of managers who are specialists in their particular asset class. For example, a small cap value manager can be great in that space. But if you asked him to pick large growth stocks, he (or she) would suck. It isnt their speciality.

If you ran the numbers looking at only seperate account managers, you'd see what I am talking about.

As far as diversifying your alpha source from different managers...I am not saying put a dozen large cap managers in your portfolio for your large cap allocation. I agree you'd revert to the mean over time. I am saying you find the best one or two managers that specialize in the space. You also balance out the aggressivness between the managers.

Tax loss selling....The manager runs a 50 stock portfolio. At any given time, some positions have gains and some may have losses. With a seperate account, you go into the portfolio and sell those with losses. i.e. You own KO that is at a loss. The PM still likes the name for whatever reason (emerging market growth opportunities). You sell KO and recognize the loss. Individuals can use capital losses to offset capital gain. Capital losses can be carried forward forever if they cannot be used today. The PM uses the cash raised to buy PEP. PEP and KO have a high correlation and are impacted by the same macro trends. You wait 31 days to avoid wash sale rules (to avoid draging losses). You sell PEP and repurchase KO. Assuming the two stocks didnt move, you have just realized a capital loss that can be used to offset capital gains. It should be obvious that this strategy does not work for tax exempt entities.
 
JackA$$,

I've looked at Aletheia, and while they have a great record, I had a few issues with them and I'd like to run them by you. Is there an e-mail I can reach you at? (or you can e-mail me at grm215atgmail.com)



Edited 2 time(s). Last edit at Wednesday, May 16, 2007 at 12:36PM by boo.
 
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