A beginner's guide to managed funds

Cost-conscious investors can benefit from the greater efficiency and transparency of managed accounts, but what are they and how do they work?

Here we answer 10 frequently-asked questions on managed accounts.

What is a managed account?

It is a professionally managed portfolio of investments. It provides investors many of the benefits of direct ownership, while having an investment manager actively review and rebalance the portfolio based on the strategy and investment decisions of the chosen portfolio manager.

A managed account may be comprised of domestic equities, exchange-traded funds (ETFs), managed funds, international equities or a combination of asset types.

An important distinction of managed funds is that when investing in a managed account, the investor has beneficial ownership of each of the underlying assets rather than a unit in a trust, which is effectively an amalgamation of the value of all the underlying assets into a single holding.  This entitlement to the underlying assets adds certain tax and other benefits.

Managed accounts are available to investors via a number of platforms, including superannuation and investment platforms. A managed account can form part of a larger portfolio alongside other assets, such as direct equities and term deposits.

There are several types of managed accounts. What are the differences?

Common to all managed accounts is that the portfolio or model is managed by an investment provider. Managed accounts that are offered as a product with a product disclosure statement (PDS) are typically called separately managed accounts (SMAs). Similarly, those that form part of an investment platform's managed account investment menu are SMAs or product-based managed accounts.

Managed discretionary accounts (MDAs) are a service and can be applied to a portfolio where the assets are legally held by a platform; or MDA services can be offered for a portfolio where the legal ownership of the assets remains with the investor.

Under both an SMA and MDA, the discretion on changes to the portfolio are put in someone else's hands (ie, not the investor's authority). The investor gets regular reporting on any changes to the portfolio, income and expenses.

How are fees structured in a managed account?

They are charged based on the amount invested and how it is invested. Fees usually have four inputs:
- Platform administrator - a fee for services administering the funds on the investment platform.
- Portfolio investment manager - a fee for the professional management of your portfolio.
- Transactions - think trading and buy/sell costs.
- Supervision (depending on the managed account structure chosen) - this might include a fee for the responsible entity, superannuation fund, MDA operator, trustee and custodian.

Do you have to invest for a certain time?

While there is no restricted timeline of how long a managed account must be held, the investment manager will provide guidance on an appropriate investment time frame, so the investor is best positioned to achieve the objectives outlined in the managed account investment strategy.

Who should invest in a managed account?

Managed accounts are suitable for anyone wanting more transparency and control when managing their portfolio.

They are a great option for anyone who is time-poor because the transparency of a managed account means an investor doesn't need to be involved in every portfolio decision. Managed accounts also provide greater efficiency for financial advisers, enabling them to have more high-value conversations with clients.

Would a managed account suit a self-managed super fund (SMSF)?

Yes. SMSFs are typically owned by investors who value control, transparency and flexibility in the way they invest, and these characteristics are consistent with what managed portfolios can provide.

Managed portfolios also provide SMSF investors with access to leading professional investment managers, investment diversity and a broad choice of professionally managed portfolio options.

Further, there are managed portfolios that can be tailored to suit specific needs of SMSF members. For example, you may wish to swap out one or more securities for another, or for cash. This flexibility (not available on all managed portfolios) allows an SMSF to implement investment strategies reflecting individual member preferences, and can help when applying ethical, social or other important factors.

Why would you choose a managed account over a managed fund?

One reason managed accounts are beneficial is their tax effectiveness (franking etc), which comes from the ownership of the assets as compared to a pooled unitised structure of a managed fund (ie, the franking credits of the investor's assets are directly attributed to them). Capital gains tax (CGT) is another factor, as the gains are attributed to the assets held, not the pooled managed fund.

Managed accounts provide greater transparency than some of the pooled investment options. Investors in managed funds share in the gains/losses accumulated and distributed within the managed fund's unit trust, which can cause inequality as the distributions will often include a CGT liability regardless of the timeframe the client has invested.

How is risk handled in a managed account?

One of the benefits of managed accounts is that they serve to assist advisers in providing financial services, and in particular advice, in a more streamlined and compliant manner. The cumulative effect is that advisers are empowered to focus on what they do best - providing strategic advice, building client financial literacy and delivering client outcomes.

So from a risk-management perspective, one of the key benefits of the managed account structure is its responsiveness - advisers have the flexibility to swiftly align a client's investment to not only changing market conditions but also to the client's changing needs and risk appetites, whether it be in their SMA portfolio or a core-satellite holding.

What are the tax implications when investing in a managed account?

Tax can be more actively managed in managed portfolios. This means with investment platforms your adviser may have the ability to manage tax outcomes in a way that better suits your needs and circumstances.

This may save you money and in turn help you grow more wealth over time by saving and reinvesting what may have otherwise been paid in tax. As with any investment, managed portfolios are subject to capital gains tax, which will be different depending on whether you are investing in managed portfolios through your superannuation account or as an individual.

What are the main pros and cons of managed accounts?

Pros:
- In some cases, the ability to customise the managed account with rules and exceptions. An investor can choose to override the investment manager's asset selection with exclude, substitute or lock features. For example, the investor may like to substitute Rio with BHP or remove non-ethical stocks from their managed account.  
- Transparency. An investor can see exactly where their money has been invested and what decisions have been made on their behalf to better understand the make-up of their portfolio and how each asset contributes to its performance.
- Tax efficiencies. Investors do not buy into any embedded tax liability, which may be the case when investing in some managed funds. Also investors can leave a managed account without having to sell the underlying investments, thus providing more control over realisation of gains.
- Access to specialist and professional investment managers.
- The investments held by the managed account are generally actively monitored and rebalanced on a systemised, consistent and timely basis.

Cons:
- Not all asset classes are available via a managed account.
- As assets are owned by the investor at an individual level, and are not pooled with other investors (as in a managed fund), some of the benefits are lost, such as diversification or access to certain investments, including property and infrastructure.
- In some instances, the timing of when a managed account is purchased might be sub-optimal - for example, if an underlying asset was at full value and was just about to be sold by the investment manager. This reduces the ability for the investor to effectively time their investment decisions.
- Managed accounts should not be purchased in small amounts, to ensure all the underlying assets can be bought and sold in an efficient manner.
- As with managed funds, managed accounts have associated fees. In some instances, there are layers of fees, for example if the managed account is made up of managed funds with their own costs.

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