Separately Managed Accounts: Does One Size Fit All?

At Hundle, we know that a ‘one-size-fits-all’ approach towards portfolio construction does not meet the needs of our sophisticated clients. We craft each investment program to fit our clients’ unique requirements including, liquidity needs, risk tolerance, investment objectives, and time horizon. To achieve this level of customisation, we employ Separately Managed Accounts, rather than model portfolios or collective funds. This article explains the benefits of this approach.

—

WHAT IS A SEPARATELY MANAGED ACCOUNT?

A Separately Managed Account (SMA) is a portfolio of individual investments managed on behalf of an investor. Unlike investment funds or model portfolios, where investors own shares of a pooled vehicle, an SMA allows investors to own the individual securities directly within a managed portfolio. This direct ownership provides a higher degree of customisation, transparency, and tax management, making SMAs a highly attractive option for ultra-high-net-worth (UHNW) clients who seek personalised investment strategies tailored to their unique financial goals and preferences.

—

CUSTOMISATION & CONTROL

One of the primary reasons SMAs are highly favoured by private clients is the unparalleled level of customisation they offer. Unlike collective funds or model portfolios, which provide a one-size-fits-all solution, SMAs allow investors to directly own individual securities within their portfolios. This direct ownership facilitates a personalised investment strategy tailored to the client’s unique goals, preferences, and constraints.

Customisation extends beyond simple asset allocation. For instance, clients can exclude specific industries or companies that do not align with their ethical beliefs or personal values. A client passionate about environmental sustainability can choose to avoid investing in fossil fuel companies without sacrificing overall portfolio performance. This level of customisation is challenging with a fund structure or model portfolio.

—

SUPERIOR TAX MANAGEMENT

From a tax perspective, SMAs provide substantial benefits. SMAs offer greater flexibility in the timing of asset disposals, which is crucial for managing Capital Gains Tax (CGT). By strategically timing the realisation of gains, clients can maximise tax reliefs. For example, spreading gains over multiple tax years allows clients to benefit from annual exempt amounts, thereby reducing total CGT due.

Another example of the benefit of flexibility of timing of disposals is that gains could be deliberately realised in a tax year when an individual is non-UK tax resident. Assuming this were a disposal of shares in a trading company, and not a real estate asset (where there is taxation of non-residents), no CGT should arise in that tax year. In addition, as long as the gain arises during a continuous period of non-residence of more than 5 tax years (i.e. five tax years and a ‘split year’ or, more simply, six consecutive tax years), then no CGT would be incurred should the individual resume UK tax residence in the future. For completeness, individuals should review which jurisdiction (if any) they may be tax resident in at the time of the disposal, as this may mean local jurisdiction tax is due on the gain. However, for those migrating to tax favourable territories, such as Dubai, no tax would arise on these personal investment gains.

Tax loss harvesting is another powerful strategy enabled by SMAs. This involves selling securities at a loss to offset gains elsewhere in the portfolio, thus reducing the overall tax burden. This practice has increased in popularity as markets experience volatility, providing opportunities to offset gains from previous years. The ability to selectively harvest losses is a distinct advantage of SMAs over funds, where timing of disposals of assets are generally beyond the investor’s control.

SMAs also provide flexibility in controlling the tax profile of investments. This includes maximising the availability of double tax treaty reliefs, which can significantly reduce Withholding Taxes (WHT) on cross-border investments. For example, US dividends paid to non-US residents typically suffer a 30% withholding tax. However, with proper structuring and knowledge, this rate can be significantly reduced or even eliminated for SMA investors. If this were paid, for example, to a Cayman Fund and then distributed to a UK individual the WHT may be suffered in full. By contrast, if paid directly to an individual (as the underlying shares are directly held due to being in an SMA), where the investment manager has some tax knowledge, this WHT can be at least halved and in some cases reduced to 0%, if various administrative points are dealt with correctly.

—

DIRECT OWNERSHIP & COST BASIS MANAGEMENT

Direct ownership of securities in SMAs also means investors have a unique cost basis for each security. This allows for precise tax management strategies, such as selling higher-cost shares first to minimise taxable gains. In contrast, where assets are held in investment funds, it is not possible to ‘cherry pick’ disposals of higher-cost shares, limiting this level of control.

Moreover, SMAs offer control over whether the underlying portfolio generates income or capital returns. For additional rate taxpayers, the current tax rate difference between income and capital gains in the UK is significant (45% income tax vs. 20% CGT). This flexibility can make a meaningful difference in net-of-tax returns and enhance real wealth.

—

FLEXIBILITY IN HOLDING STRUCTURES

SMAs provide flexibility in how investments are held, whether personally or through a holding structure like a Family Investment Company. This flexibility supports broader financial planning objectives, including succession planning and asset protection. For UHNW clients, the ability to tailor the holding structure of their investments to meet specific family and estate planning needs is a significant advantage.

—

ACCESS TO ALTERNATIVE INVESTMENTS

Another compelling reason to consider SMAs is their ability to incorporate tailored alternative investment programs, including private market opportunities subject to individual client risk profiles. This is particularly beneficial for UHNW clients seeking diversification beyond traditional asset classes. At Hundle, we create bespoke alternative investment strategies following a detailed assessment of a client’s liquidity and risk requirements. This tailored approach allows investors to access the diversification benefits of alternatives, such as private equity, hedge funds, and real estate, which are often not accessible through investment funds or model portfolios.

Where appropriate, alternative investments can offer enhanced returns, reduced volatility, and low correlation with public markets, making them an important component of a diversified portfolio. SMAs facilitate the inclusion of these investments by providing the necessary flexibility and customisation to meet individual client needs. This strategic inclusion of alternative investments can help in achieving superior risk-adjusted returns while aligning with the client’s overall financial goals.

—

ENHANCED TRANSPARENCY & REPORTING

Transparency is further significant advantage of SMAs. Investors in SMAs receive detailed reports about their holdings, transactions, and performance. This granularity is typically unavailable with funds, where holdings are often disclosed on a quarterly basis. The frequent and detailed reporting allows for informed decision-making and adjustments, enhancing the ability to respond to market changes and personal financial needs.

—

CONCLUSION

SMAs can offer UHNW clients a superior investment vehicle compared to model portfolios or investment funds. The benefits of customisation, transparency, tax efficiency, and access to alternative investments, make SMAs an optimal choice for clients with sophisticated financial needs and goals. By leveraging the unique advantages of SMAs, UHNW investors can achieve greater control over their investments, maximise after-tax returns, and align their portfolios with their personal values and financial objectives.

For those looking to explore the benefits of SMAs further, our investment and wealth structuring teams are ready to provide personalised advice tailored to your unique financial situation. Please reach out to Andrew and his team at asams@hundle.co