A Brief Overview of Separately Managed Accounts by Lord Abbett

Separately managed accounts (SMAs) have experienced significant growth recently and have garnered increased attention from investors as a potentially effective method of constructing investment portfolios. Research by Cerulli Associates projects that assets in SMAs will rise to $3.6 trillion by 2026, a stark increase from $778 billion in 2013 and $2.2 trillion in 2023.

SMAs, originating in the 1970s, were originally designed to provide individual investors with institutional-quality investment management. Retail investors had access to broad diversification and professional money management through mutual funds, whereas separately managed portfolios of individual securities were exclusive to investors that met institutional minimums. Advancements in technology have driven down account minimums for much of the industry. In today’s landscape, SMAs offer individual investors the opportunity to potentially benefit from institutional-style professional management across a variety of equity and fixed-income strategies with significantly lower minimums than institutional separate accounts, such as starting as low as $50,000 for equity portfolios.

Several key features distinguish SMAs:

One advantage of SMAs is their transparency, offering a real-time view into portfolio holdings. Investors have the flexibility to personalize their portfolios, shaping tailored investment strategies aligned with their specific goals and risk profiles. Furthermore, SMAs grant the ability to implement security and industry restrictions. SMAs also provide tax efficiency through embedded capital gains, as investors will only incur taxes on gains related to their account. Additionally, tax-loss harvesting allows investors to strategically take losses on individual positions to offset gains in other parts of their portfolio, thereby reducing their overall tax obligation.

SMAs can potentially address investors’ preferences for personalization, customization, and tax optimization. They enable tax-loss harvesting and other tax management strategies to help optimize after-tax returns. With the direct ownership of underlying securities, SMAs provide investors with enhanced transparency and control, allowing them to exclude specific companies or sectors from their portfolios based on personal preferences and risk-tolerance profiles.

Various scenarios can benefit from the features of SMAs, such as excluding concentrated stock positions from a portfolio, limiting exposure to specific industries, or having more control over realizing tax losses. SMAs also permit investors to impose limits on states, credit ratings, or maturity ranges in their municipal bond portfolios. While SMAs require higher minimum investments of $50,000 or more compared to mutual funds or ETFs, they offer a compelling option for investors seeking greater control and flexibility over their investment portfolios.

In conclusion, SMAs serve as a valuable investment option for investors looking for personalized, customized, and tax-efficient investment strategies. As investor conversations continue to evolve in the current market environment, the characteristics and benefits of SMAs make them an increasingly important consideration for optimizing investment returns and achieving long-term financial goals.