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Separately managed accounts (SMAs) are a segment of money management that is growing ever more popular with advisors who work with high-net-worth individuals, large family offices, and endowments. Though they got their start in the 1950s, these aren’t your parents’ managed accounts. Wrap accounts at wirehouse brokerage firms and the popularity of fee-based compensation have contributed to SMAs’ growth as investment vehicles. Fees have dropped, SMAs are often more tax-efficient than mutual funds, and some managers offer a high level of customization. Although minimum investment amounts are fairly steep, some clients who might never have considered an SMA before may soon want to invest in one.

But with some 5,000 SMA products in the marketplace it can be overwhelming to separate the wheat from the chaff. Recognizing that, Investment Advisor has for the second year in a row joined with Standard & Poor’s and Prima Capital to recognize the best SMA products and managers as winners of the Separately Managed Accounts Awards. Prima Capital’s Geoffrey Selzer, director of professional services, and Nathan Behan, senior analyst, sifted through mountains of SMA data in the S&P/Prima Capital SMA Evaluator (at and came up with a short list of nominees from which the winners were selected. A committee that included Philip Edwards, managing director of Standard & Poor’s Portfolio Advisor Services; Prima Capital President J. Gibson Watson III; IA Editor in Chief Jamie Green, and IA Staff Editor Kathleen McBride selected the award recipients.

To be considered, each portfolio had to be offered through a broad range of retail programs; have assets of at least $200 million under management; have at least an average score in four out of five categories in SMA Evaluator; and the lead manager must have been in place at least three years.

“When you look at the total universe of separately managed accounts out there, there are roughly 5,000 products. The issue becomes one of culling that universe down to a suitable sub-universe that is appropriate for high-net-worth individuals and families, and for the advisors and brokers that serve those types of clients,” says J. Gibson Watson III, president of Prima Capital. He says there are between 700 and 800 SMAs in the “real world universe,” that are viable candidates for HNW individuals and families that comprise the retail market for SMAs.

Overall assets in SMAs grew to $678.1 billion in 2005, up 17.7% from 2004, according to an MMI Manager Series Report by the Money Management Institute (MMI) in Washington and Financial Research Corporation (FRC) in Boston. FRC projects an average annual growth rate in SMA assets under management of 18%, reaching a total of $1.526 trillion in SMA assets by the end of 2010.

Expenses for SMAs generally are a bit lower than those for mutual funds. “For an actively managed equity mutual fund, you’re looking at something in the neighborhood of about 141 basis points in terms of a management fee. What makes the comparison interesting for the investor is that that fee is embedded in the net asset value of the mutual fund,” says Watson. In SMAs, managers report gross performance instead of net-of-fee performance, so it might seem logical to deduct the fee from the manager’s gross performance. Typically, though, “what you’ll find in the managed account world is that you’re just looking at the management fee for the product,” Watson points out. “The managers typically have a standard retail rate for investors who come in off the street, ranging anywhere from 75 basis points up to 1%, but for the sponsor programs and the distribution systems that they’re willing to participate in, the sponsors will negotiate those management fees down to 50 basis points for equity and roughly 35 basis points for fixed income. The wirehouse brokerage firms have successfully negotiated those fees further south.”

A new generation of managed accounts has started to become popular, variously called overlay accounts or model-based multi-manager accounts. These are similar to unified managed accounts, but in the overlay accounts, says Prima’s Watson, “the manager will submit his portfolio models directly to the sponsor or to the overlay manager,” electronically, and the sponsor, using overlay portfolio management software, will do the actual trading to “allow more efficient trading between the different sleeves of a portfolio.” That yields a much more tax-efficient process, including better management of wash sales, and it’s very cost-effective, according to Watson. The drawback is that not all SMA portfolio managers are comfortable with this technique because it means that “the manager is giving up his or her intellectual property to that sponsor or overlay portfolio manager. Watson says, “It gets down to how that manager generates alpha, and the nature of his business.” On the plus side, says Watson, the managers outsource a lot of their operational, trading, and client service duties to the sponsor, allowing them to “focus on the portfolio management and investment research.” Fees for these accounts can drop “in some cases to 30 to 35 basis points for equity.” He says not all asset classes are available in the multimanager accounts–fixed income and emerging-markets equity are two that are not liquid enough to use these platforms–so the bigger selections would be in the most liquid classes, such as large-cap and some mid- and small-cap equity managers.

With greater availability, lower fees, and new platforms from sponsors where advisors can vet their own choices or select from already vetted SMA portfolios, overlay accounts, or model-based multimanager programs, it would seem that SMAs may be a more attractive option than ever before.

Small Cap

Riverbridge Partners

Small Cap Growth

Investors who are “somewhat risk averse but still want exposure to the small-cap space” may find a home in the Riverbridge Small Cap Growth portfolio, says Rick Moulton, research analyst and principal at Riverbridge Partners LLC in Minneapolis. Winner of the Small-Cap SMA Award, the portfolio is managed by a team: Moulton; CIO Mark Thompson; research analysts and principals Philip Dobrzynski and Dana Feick; and research analyst David Webb. Moulton says the key to their success is that “we’ve worked together for a very long period of time, in fact Mark, Dana, and I date back over 14 years.”

“Our small-cap portfolio, which dates back to 1988, has experienced only two down years relative to the Russell 2000 Growth Index, which has experienced five down years,” says Moulton. Companies in the portfolio are profitable and have the ability to finance their growth internally, so they don’t have to borrow money in a tight credit environment or sell shares to the public, notes Moulton, and the team selects companies that have high degrees of recurring revenue and very predictable earnings growth.

“What separates us from a lot of managers is how we define quality management; we conduct a peer review,” according to Moulton, “speaking with customers, competitors, suppliers, venture capitalists,” to determine the quality of a company’s management.

Moulton feels the account is ideal for investors who have a long-term focus, not those who chase hot performance. “If we have a speculative market like we had in 1999, we’re probably not going to be the manager delivering the best returns, though it’s highly unlikely that our portfolio loses money over an entire year. We’ve done it twice, so it can happen, but we’re much more stable than most managers.” Moulton attributes their tax-efficiency ratio, “often above 90%,” to low turnover.

The minimum portfolio size for individuals is $100,000, and high-net-worth individuals get the same portfolio as institutional clients, but particular names can be excluded for individuals who want such restrictions, and the team can conduct some year-end tax-loss harvesting. While they are adding new distributors this year, Moulton says “if things go well we could be closing this portfolio within the next 12 to 18 months.”–Kathleen M. McBride

Mid Cap

Anchor Capital

Mid-Cap Value Equity

The prevailing philosophy at Boston-based Anchor Capital is that “Preservation of capital is as important as adding to capital,” says CIO Mark Rickabaugh, the executive VP and lead portfolio manager for the winner of the Mid-Cap SMA Award, Anchor Capital Mid Cap Value Equity. Teamed with Senior VP and Portfolio Manager Sharon Siegfriedt, they strive over a market cycle to always outperform on the downside and “on the upside to capture the return of the market but not try to go for the maximum,” since doing so might keep them from preserving capital. This shows up in consistently good performance, with lower volatility than its benchmark, the Russell Mid Cap Index.

The team uses a bottom-up investment process, according to Rickabaugh, looking for companies that are “undervalued or fairly valued, where the underlying companies are doing well or about to do well,” as indicated by orders for goods or services, and companies that are growing at reasonable or fast rates, but trading at undervalued prices, in a capital range of $500 million to $10 billion. “Investing in mid cap is a long-term proposition,” says Rickabaugh. The team won’t invest in a large-cap company that looks–or acts–like a mid-cap; it has to actually be a mid-cap.

One model the managers use involves higher or growing dividend-paying companies–valued using cash dividends, not projected dividends– “where the dividend is the biggest value component of the business, but the fact that it grows or continues at a good rate is a function of the business itself.” Rickabaugh says some of the companies they invest in on this basis can produce “surprising returns.” Here, they look for 7% to 12% total return but some do much better than that. The dividends also can help cushion the portfolio in down market cycles, contributing to lower standard deviation.

It is not unusual for the account’s typical investors to allocate in the area of 20% to the account. Of note: on February 27th Boston Private Financial Holdings agreed to acquire an 80% stake in Anchor Capital. Rickabaugh says the deal will enhance Anchor’s stability, continuity, and succession plans, and that Anchor will remain autonomous. “Our view is that mid cap is an investment style for the rest of your life; we think our approach will work for a long period of time.”"–Kathleen M. McBride

Large-Cap Growth

Oak Ridge Investments

Large-Cap Growth

David Klaskin, co-founder of Oak Ridge Investments LLC in Chicago, and manager of the firm’s large-cap SMA product, believes firmly in growth, but at a reasonable price.

“We do focus on companies that are generating consistent earnings growth, but what separates us from others is that we pay a lot of attention to valuation,” Klaskin says. “We have a long-term horizon for defining growth: If it looks okay now but does not seem sustainable, then we will not be there.”

“We have now started to pare back our holdings in healthcare, because we think that valuations are getting too high,” Klaskin said. “Healthcare has outperformed the market over the past six years, but we think it’s time to reduce our exposure. We have also reduced our energy holdings to market-weight.”

Valuations aside, Klaskin also places a great deal of emphasis upon a company’s long-term goals and objectives, as well as the experience and commitment level of its management team. These factors, he says, are clear determinants of a company’s staying power and its ability to keep generating consistent returns.

“We have good access to management these days, even in the large-cap sphere, and this is great because we have the ability to get one-on-one with large names in order to keep our fingers on the pulse,” Klaskin says.

Oak Ridge Investments has $3.6 billion in assets under management, of which about $2 billion is in the large-cap sphere. Sixty percent of the firm’s business is separately managed accounts.

Last year, the firm sold part of its holdings to Pioneer Investments, which helped to increase distribution channels as well as provide much-needed critical mass in the large-cap space, Klaskin says.–Savita Iyer

Large-Cap Value

Thornburg Investment Management

Thornburg Value Equity

Growth is not a dirty word for me,” says Bill Fries, manager of the Thornburg Value Equity portfolio, whose goal is to invest in promising companies that have good growth potential and that can be bought on the cheap.

To this end, Fries and his team classify potential investments into three categories: Basic value companies (those that are cyclical with regard to macroeconomic conditions); consistent earners (blue chip firms that have high levels of profitability); and emerging franchises (younger companies with a high profile for revenue growth).

Separating the stocks in this manner provides the kind of diversification that makes a portfolio less subject to volatility. But Fries also applies a strict screening process in selecting potential investments, and he keeps the number of stocks in the portfolio at just under 50. He also limits allocations to a particular industry to around 25% of holdings.

An emphasis on knowing a company inside out, not just its financials, but its corporate culture and general modus operandi, are high up on Fries’s list.

“We are doggedly determined to understand the fundamentals of the companies we select, and we really get into the nitty-gritty,” he says.

Thornburg makes good use of Wall Street research, but Fries says it serves the firm best as a jumping off point from which it makes its own decisions–many of which have been contrary to conventional wisdom, but have paid off highly for Thornburg. Fries gives the example of the energy sector, which a few years ago was not seen as an area of great growth, but has done extremely well by Thornburg.

“No one, including us, really thought in 2002 that energy prices would go as high as they did,” he says. “But once we began evaluating the basic companies on our own, we thought that profitability would be far higher than people thought, and we have indeed had a very good experience with our energy holdings.”

Fries has been managing the $2.15 billion Value portfolio since its inception in 1995.–Savita Iyer


Philadelphia International Advisors

International Equity ADR

A single product and a focus on offering steady and consistent returns is what James Lobb and Andrew Williams believe to be Philadelphia Investment Advisors’ (PIA) forte.

“Our method is to employ a value-based investment discipline and to customize risk through a fundamental approach,” says Lobb, managing director of sales and services at PIA.

The firm–which is majority owned by its employees and partners (former owner Glenmede serves as a 25% limited partner)–focuses on non-U.S. equities across the globe. It has a long-term and risk-aware approach to these markets, based on the belief that an unhedged portfolio of companies with traditional value characteristics and positive company-specific catalysts, concentrated in countries that also exhibit strong value characteristics, will consistently outperform.

“Our models examine companies on the basis of valuation and profitability, and estimate provision momentum,” says Williams, who serves as lead portfolio manager for the international equity effort. “We look at countries and regions, but our first cut is always to see how a company is performing relative to other stocks in its region.”

In 2005, PIA (which has around $6.6 billion in assets under management) found good value in the energy and materials sectors, and the firm was also well rewarded in some select emerging-market companies, which from a valuation standpoint, presented a unique opportunity, Williams said. Names on the list included Indian software company Satyam, Korea Electric Power, Taiwan Semi-Conductor, and Mexico cement company CEMEX.

While PIA’s partners and employees have vast experience in international investing, Lobb and Williams believe their company’s strength lies mostly in its unique culture, founded on a spirit of partnership and collaboration. Everyone brings something to the table when it comes to analyzing companies, Williams says, and “the rewards an individual gets by seeing the impact of their advice is a source of great satisfaction.”

Lobb also believes that adherence to a limited number of SMA models (the firm began by following only the Lockwood model) has kept PIA’s business in good stead. “There are so many firms who follow multiple SMA models, but we think it’s best to not try to be everything to everyone, and to be only in a handful of programs,” he says.–Savita Iyer


Appleton Partners

Tax-Exempt Municipal

Long-term management, consistent performance, and access to management helped Boston-based Appleton Partners Tax-Exempt Municipal portfolio to win in the Fixed-Income SMA Award category. They use “a team approach to management which I think is unique; our portfolio managers are actually doing the investing–we do not have a separate trading desk so the portfolio managers are very close to the clients, and specific client needs, as well as to the markets and understanding what’s available,” says Senior VP Bonnie Tracy, a member of the portfolio management team that includes Thomas Hovey, Anson Clough, Greg Lally, Jim Ladge, and Jim Bosland.

The portfolio is customized for customers in high-tax states to maximize tax efficiency. For example, says Tracy, “a California client would have about 60% of their portfolio in California municipals with a duration of about five years, an average AAA quality, a coupon of about 5.15%, and a yield between 3.75% and almost 4%.” The managers will diversify by issuer and geographically, and strive for liquidity, all of which contributes to their ability to adhere to the goals of their clients and advisors: “Preservation and growth of capital without exposure to excessive interest rate- or credit risk. This is a high quality allocation for our clients.” The managers will also create a hybrid portfolio of taxable and tax-exempt securities for clients with special tax situations.

Tracy says the team constantly monitors the municipal markets to exploit the inefficiencies of those markets: “supply and demand, states that fall in and out of favor over time, specific issuers who are being rewarded by the market, structure–callable versus non-callable; and positioning on the yield curve–to get appropriate duration.”

Typical clients are investment advisors for large family offices, high-net-worth individuals, and endowments, “ideally $1 million to $100 million,” according to Tracy; the minimum is $500,000. Distribution is growing organically with existing partners. Appleton is selective about adding large sponsor-driven relationships, although they are looking at adding one additional relationship.

What makes Appleton different, says Tracy, is that Appleton offers more customized solutions, “market professionals instead of marketing professionals,” and they “continually monitor the portfolios after the initial build-out period to make sure we’re optimizing the return, and taking advantage of what’s in the market.” They consider both the advisor and the end-user client as their clients. The team, according to Tracy, is “very cautious about credit, knowledgeable about duration and the yield curve, and the importance of where to position rate risk; this is what we do.”–Kathleen M. McBride

Tax Efficiency

KCM Investment Advisors

Large-Cap GARP Equity

Building portfolios, not collecting stocks, is how Jay Kellett, founder and CEO of Greenbrae, California-based KCM Investment Advisors, describes his company’s approach to managing their Large-Cap GARP Equity portfolio.

Kellett and his team apply a disciplined, top-down approach to selecting market sectors, and assigning target weights to each. They then choose individual stocks based on a combination of classic fundamental analysis and proprietary valuation analytics, to find those that have intrinsic value and “growth at a reasonable price” (GARP) characteristics, all the while ensuring that tax efficiency remains an overriding theme. “We take into account clients’ individual tax situations and from there, build the perfect portfolio for them,” Kellett says. “We are willing to customize portfolios in order to accommodate our clients’ needs and desires.”

Not only does the KCM team endeavor to harvest losses for their clients, and use dividend-paying stocks to take advantage of favorable tax treatment, they also try to keep the turnover of stocks in a portfolio as low as possible.

“Often we inherit a portfolio with quality stocks that we’d rather not slash and burn,” Kellett says. If, for example, a client had Chevron stock with a very low cost basis in their portfolio, even if KCM uses Exxon, the firm would still keep Chevron in the portfolio, substituting it for Exxon and saving the client a tax bill. The firm also handles many balanced accounts, Kellett says, so KCM must also be tax efficient on the fixed-income portions of the portfolio.

“Often this means using tax-free bonds that are issued by the client’s home state, but depending on the client’s tax bracket, and whether or not they are subject to the alternative minimum tax, it could mean that corporate or agency bonds, which are only taxed at the federal level, would generate the best after-tax returns,” Kellett says. “If the client’s earned income is high enough, it is possible that municipal bonds that are subject to the alternative minimum tax will produce the best results.”

Founded by Kellett in 1996, KCM currently has $1.6 billion in assets under management. The bulk of the firm’s clients are high-net-worth individuals, all of whom have direct access to their portfolio managers whenever they need them.–Savita Iyer

Staff Editor Kathleen M. McBride can be reached at [email protected]. Freelance business writer Savita Iyer can be reached at [email protected].


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