Zephyr Financial Solutions

Three Steps To Identifying Best-In-Class Separately Managed Accounts

Separately managed accounts (SMAs) are growing in popularity and poised for mainstream adoption as investors demand more transparency, control, and customization in a post-pandemic world. 

SMAs provide investors with a professionally managed portfolio of individual securities, which allows the investor to directly own all securities in the account. This feature makes SMAs popular with investors who may want to optimize tax efficiencies or customize the portfolio to include companies that exhibit superior ESG characteristics. 

Historically, SMAs have been earmarked for high net worth investors due to their hefty account minimums. However, the advancement of trading fractional shares at wire houses and turnkey asset management platforms may bring down the minimums and make SMAs accessible to a much wider pool of investors and add to their growth.  

With the popularity of SMAs trending upward it is important to know how to find and conduct continued due diligence on SMAs. Below we outline some of the key steps when searching for top SMAs based on quantitative and qualitative characteristics within the Zephyr Investment Management Software platform. 

Step 1 - Initial Qualifying Filters 

First, within the “Screening” module select the manager universe that contains the type and style of manager you are looking for. For example, U.S. Large Value or U.S. Core Fixed Income. After selecting the appropriate universe, filter for SMAs that are open and follow the GIPS guidelines when calculating their performance. This is when you can also filter for managers that include ESG investing or are minority owned. 

Step 2 - Quantitative Filters

Now that you have narrowed down your list of managers who are open to new investments, GIPS compliant, and are similar to the style you are looking for; you can start using quantitative analytics to narrow the list further. There are numerous quantitative return and risk metrics to use when searching for managers who exhibit consistent, long term returns with low risk. Please know, if you are looking for more information on different investment analytics, you can leverage our library of investment analytics here. Figures 3, 4, and 5 show the steps when filtering managers based on quantitative measures. These are some of the metrics that we prefer to reference and believe they do good job of capturing the manager’s ability to provide consistent returns while minimizing risk.  

The first step is to locate and select the metric you want to include in your search criteria from the left-hand navigation bar under the “performance” tab , in this case we will use 5-year returns. Next, we determine the time periods and if necessary, the rolling windows that will be used in the calculation.    

Step 3 - Qualitative Filters 

The quantitative metrics above do a great job of crafting a story around the manager’s ability to provide consistent, excess returns. However, those metrics do not help you determine how the manager and firm locates and manages market inefficiencies. The next step is to take a deeper dive into the manager’s investment process, the investment team, and the firm’s culture to gather more insight about the firm’s ability to capitalize on market inefficiencies. Here is a question worth considering when conducting a thorough manager due diligence. . 

Does the manager's view on market inefficiencies remain consistent through all market environments or does it change through different market headwinds and tailwinds? Does the manager remain committed to his/her investment style when that style is out of favor? Or is he/she going to change their investment methodology to try and capitalize on the hot new investment style or sector? 

Not only does this type of fact finding provide you with a better understanding of the firm’s investment philosophy, but it also helps you determine if the strategy exhibits style drift. It is also important to determine if the asset management firm is committed to SMAs or is it a second thought for the firm. The firm should be committed to the SMA investment vehicle and provide them with resources just like they do for mutual funds or ETFs. 

Zephyr offers the ability to filter over 200 qualitative fields to gain a better understanding of the firm’s investment philosophy. You can locate and select the qualitative fields using the “Firm Information” and “Product Information” tabs on the left-hand navigation menu. Below you will see we included some fields in our search. 

With SMAs growing in popularity due to transparency, control, and customization and technology creating cost efficiencies for investors across the wealth spectrum, it is a good time to determine if SMAs are a good fit for your practice and clients and characteristics to look for when thinking about placing your client’s money with a manager. 

Tag: Strategies for Wealth Management