Caution advised in global SMAs


By Sarah Kendell

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Advisers looking to use managed accounts for their clients’ global equity allocations should consider a number of factors to ensure optimum performance, including clients’ existing equities investments, their currency exposure and their investment horizon, according to Arnhem Investment Management.

Addressing a webinar hosted by the Institute of Managed Account Professionals yesterday, Arnhem global portfolio manager Theo Maas said while it was important for clients to add global equities exposure to diversify risk in their portfolio, advisers must consider how clients were funding any investment into international shares.

“About 54 per cent of the [ASX 200] index is concentrated in two sectors – financials and materials – and around 23 per cent of the MSCI World is in these sectors too,” Maas said.

“Prevailing portfolio wisdom talks about adding global exposure through an ETF (exchange-traded fund) or managed fund, but the problem with that is your clients will typically sell their cash holdings to fund this move, meaning they will end up with more exposure to those two sectors, so it doesn’t solve the issue of concentration risk.”

While advisers could limit concentration risk by ensuring the managed account they chose was overweight sectors unavailable on the ASX, such as information technology, they also had to be aware managed accounts as a whole did not currently offer currency hedging as a feature, he said.

“Clients also need to understand that because of the $50,000 minimum portfolio size, their investment will be concentrated in around 15 to 30 stocks and there will be some exclusions to what you can invest in – for example, nominal stocks like Priceline in the US which trades at $1600 a share,” he noted.

The high stock concentration, combined with the low portfolio turnover that was a common feature of managed accounts, also meant managers such as Arnhem usually invested with a longer-term time horizon in mind, which was also something for clients to be aware of, he said.

“In an SMA (separately managed account) structure everything can be seen by clients, which is a good thing, so you do things differently than you would for a unit trust – we are not going to offer a long list of transactions to SMA investors because every transaction has their own cost attached to that,” he said.

“So for us, all our 20 current holdings are core – you have to be selective because with a long investment horizon you are not going to trade around certain positions, so we typically buy a company with the intention to hold around five years.”

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