Exploring The Middle Ground Of Running A Share Portfolio

Sun Herald

Sunday November 20, 2005

GEORGE LIONDIS

MERRILL Lynch's new Separately Managed Account (SMA) offers a middle ground between direct share trading and managed funds.

"Separately managed" does that mean I have my own broker at my beck and call?

Not quite. An SMA is your own customised portfolio, but a broker will be managing a lot of other accounts, similar to yours, at the same time. If the brokers decide to change their position on a stock, they will make that change to all the SMAs under their control, rather than consult you individually. Unfortunately, you won't have a personal broker all to yourself.

Who picks the shares?

Expert analysts and fund managers will pick a "model" portfolio of shares that your individual SMA will replicate. You can choose from a range of "model" portfolios, depending on how much risk you want to take and, of course, how much you expect to get back in return.

What if I don't like a stock in a model portfolio?

You mean, "What if I think I can do better than those expert analysts and fund managers?" You can ask that a particular stock be left out or, for that matter, added to your individual portfolio. For example, if you already own a whole lot of Telstra, you can ask for the company to be left out of your SMA.

But I own the shares in the SMA, right?

Yes, absolutely. Unlike managed funds, where you own a unit in the fund, an SMA allows you to own the underlying stocks yourself. That way you can see every time a fund manager buys more of one stock, or sells out of another. That information can be pretty hard to come by in a managed fund.

Why shouldn't I just go to a broker, or online, and buy the shares myself?

Good point. No doubt that is exactly what many people prefer to do. But some might like the safety net of having a professional manager overseeing their portfolio. Think of it as an umbilical chord, but without an overprotective mother.

OK. But if I wanted professional management, why wouldn't I just use a managed fund?

A good reason is tax. Because you own the stocks yourself, you can manage your tax position personally. You don't, for example, have to crystallise gains or losses when you move between model portfolios, the way you might have to if you switched between managed funds. Also, you obviously get more hands-on control of your investments compared with a managed fund.

Fair enough. But you have to be a millionaire to afford it, right?

Traditionally, yes. A few years ago, you wouldn't even have dreamt of setting one up unless you had more than $500,000 to invest; it would just have been too expensive. But things are changing. Technology is driving costs down, making it possible for people with smaller accounts to own SMAs. Some modelling suggests SMAs can be cost effective for people with as little as $10,000 to $20,000 to invest. But do your sums; these accounts are not for everyone.

So how much does it cost?

It can vary greatly depending on what sort of model portfolio you choose, but there are usually three layers of fees: an admin fee, an investment management fee and an added performance fee, which kicks in only if the stocks perform well.

How do I get in?

Because this type of structure will not suit everybody, you should speak to your financial adviser before doing anything.