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Unified managed accounts are in vogue, but watch the fees

Jan 21st, 2007 | Filed under: Investment Management Fees

By: Will Swarts, SmartMoney.com
Published: January 12, 2007

A quick follow-up to our posting on UMAs being an enabling technology for retail adoption of portable alpha: this article illustrates we’re not alone in our belief.

“Unified managed accounts expand on the basic function of conventional SMAs, which allow investors to own actual shares of stock, rather than shares of mutual funds that invest in those stocks, but also fold in other investment portfolios. Putting your mutual fund and ETF portfolios under a UMA structure won’t do much for your tax situation [ed: UMA proponents disagree] , but it boosts the level of coordination between these types of investments, letting you get the most out of the money management services for which you’re paying.”

Buying individual shares - and more importantly ETFs – allows advisors to create synthetic mutual funds by combining their own betas with alpha from various sources. Conversely, the ability to short-sell individual shares or ETFs allows investors to isolate alpha and reduce systematic risk (e.g. market risk) in their portfolios.

According to research & consulting firm Cerulli Associates, there remains a lot of room for growth in the UMA sector. Currently, only 3.2% of the $680 billion invested in SMAs is managed in true unified managed accounts.

Bevan Crodian, chief executive officer of Market Street Advisors points out why to SmartMoney.com:

“The most cost-efficient way to do it is to have managers [of separate accounts] pass their models on to an overlay manager, and some [SMA] managers are unwilling to do that,” he says. “The other alternative is to have managers run the individual ’sleeves’ themselves, which is a possibility. Based on the technology that people are using to run these things, that’s very hard to do and very expensive.”

And this is why SmartMoney.com says “watch the fees”. But by the same token, herein lays a mammoth software opportunity. A quick personal anecdote suggests why.

Alpha Male once developed a “synthetic hedge fund” by genetically splicing together the portfolios of a long-only fund and a short-bias hedge fund. The exact proportions of each were determined by their specific holdings and beta-weighted net exposures. The result was a “new” fund (essentially a fund of funds) that met the specific characteristics demanded by a particular group of investors. While this process was very rudimentary, it’s not a big stretch to imagine adding long or short positions in ETFs or specific stocks to create a more exotic synthetic portfolio. This was only possible because all of the funds involved used the same home-grown portfolio management system.

Without this system, none of the portfolios would be able to dynamically “compare itself” to their peers. So if UMAs can create such an open architecture for portfolio reporting then, based on our experience, they will surely revolutionize the wealth management industry (beginning with the way managers are organized).

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