When they first appeared, separate accounts were limited to institutions, endowments, foundations, and a handful of individual investors with multiple millions of dollars. For the most part the business was limited to the large wirehouses and of little consequence to most independent advisors. That’s far from the case today, as a variety of new separate account options have come onto the market and an increasing number of investors seek them out.
Across the board, separate account providers are seeing increased demand. While they have captured only a fraction of the assets in the mutual fund market, many in the business expect that ratio to change in the coming years.
“Generally speaking, we see solid growth for separate accounts propelled by a number of factors,” says Mark Spina, a senior VP who heads up business development at ING Investment Management in New York. “One is the greater understanding in the marketplace of separate accounts. Another is the increased interest in transparency and customization that managed accounts offer.”
“The separate account process is on a lot of people’s minds,” says Ross Rogers, president of GlobalBridge Inc. in Minneapolis, who attributes the increased interest to a number of factors, including the market decline of the last few years, the research scandal on Wall Street, and the more recent trading improprieties permitted to occur by some mutual fund companies.
“The industry’s going to go through a lot of change and it’s going to happen probably sooner rather than later,” observes Scott Hamill, managed accounts senior product manager with Russell Investment Group in Tacoma, Washington. Hamill cites Cerulli Associates’ research. “There’s something like $7 trillion in assets in mutual funds,” Hamill says. “There’s about $500 million in separate accounts, but those assets are expected to continue growing at around 15% a year through 2007.” Hamill argues that much of the interest and growth will be driven by investors who want more control over the underlying securities in their portfolios. “If it’s a taxable account, they want the ability to take their gains and losses when it best suits them instead of at the end of the year,” he says, “and they want the ability to get access to their funds on a more efficient basis.”
Among the biggest innovations in separate accounts has been the development of multi-style or multi-asset portfolios and of overlay portfolio management. Hamill explains multi-style portfolios as a mix of different managers put together in one box, and within that box is a “sleeve” for each manager. This allows each manager to be monitored individually and lets the administrator compare those managers’ trading activities to avoid penalties for investors such as those that would arise from violations of the wash sale rule. “In this situation, a Russell person or a Smith Barney person or a Merrill Lynch person could become the overlay portfolio manager,” says Hamill. “These kinds of accounts are not yet a big part of the industry–maybe 5% to 10% of all separately managed account assets–but this kind of oversight is something that high-net-worth people are really concerned about.” That in itself, says Hamill, is reason enough for advisors to get more active in separate accounts.
In addition to the benefits offered by increased control and transparency, there are a number of other factors contributing to the growth of separate accounts. Chief among these is the increasing size of the community of very wealthy Americans. According to the recently released 2004 World Wealth Report from Capgemini and Merrill Lynch (see news story on page 18), there are more than 2.5 million high-net-worth individuals in North America, with combined assets in the neighborhood of $8.5 trillion. By 2008, the report predicts these individuals will collectively have some $14 trillion in assets.
Hand in hand with the greater number of HNW individuals are new offerings in the separate account space with lower costs of entry, expanding the number of potential participants even further. Gurinder Ahluwalia, president of GE Private Asset Management in New York, credits this to advances in technology, which allowed his firm last year to introduce a product that offers separate account benefits but only requires a $50,000 account minimum. “The beauty of such products is that by using technology, managers, and the way accounts are melded, you’re able to bring that minimum down significantly. So now with $50,000 you can have an array of international stocks, dividend-paying stocks, and specialty, U.S. core, or growth stocks.”