The benefits of managed accounts hold true

Managed accounts are proving themselves in the COVID-19 operating market as advisers are swamped with rebalancing activity and clients look to them for hand holding and extra communication.

“The experience so far with managed accounts has been a strong one and we are certainly not going to have a more extreme environment  to really test managed accounts and SMA’s structures than the current one,” said David Wright, co-founder of Zenith Partners.

He added: “I am not sure how many [advice] practices would have survived through this period without managed accounts, particularly those practices with large amounts of clients and the rebalancing activity required.”

With investment portfolios becoming increasingly distorted by market activity, rebalancing of client portfolios has been critical to ensure they remain in the risk profile / portfolio type they have agreed with their adviser.

As an example, following the initial dramatic market drawdown,  portfolios were overweight in the defensive assets and underweight in growth assets like global and Australian equities. If portfolios were not rebalanced at this point, investors would not have participated in the equities markets rebounds to the extent they should have.

“For advice groups operating a managed account structure for client portfolios,  it means no client is left behind with a portfolio change or rebalance,” said Wright. “Every client in that portfolio experiences the change.”

Market observations by Wright include the indiscriminate selling of highly liquid securities where investors panic and want their money back. He said, this often happens in a market correction where the most liquid assets are the first to be sold. This has affected fixed interest markets where we have seen buy/sell spreads on managed funds and ETF’s widen and continue to readjust.

Also the inclusion  of alternative strategies as a defensive and diversification tool in portfolios has been very effective through the current market environment in both generating positive returns and protecting capital

While in more recent times, financial advisers and investment managers may have been challenged in justifying their inclusion in investment portfolios because they haven’t kept pace with bull equity markets, now they are providing good absolute returns and strong capital protection.

“Alternative strategies have come back to the fore and have protected portfolios in the drawdown,” said Wright.

Over the past two to three years, Wright said portfolio diversification had also been under some pressure from extended bull equity markets. However, in the market drawdown and highly uncertain investment and economic environment we are in, diversification has worked well and paid dividends.

Active managers are also now well placed in this COVID-19 market fallout. While strong equity markets often support lower cost investment options such as index managers and ETFs, a sharp market drawdown and high levels of volatility results in wide disperiosn in the returns of sectors, regions and stocks, an environment where quality active managers will come to the fore.

“This is the time when quality active managers can really show their metal.”

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