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Luke PriceMember of Ethical Advisers Co-op Australia & Ethical Investment Advisers
Luke Price has worked in the financial services industry since 2009 and has a background in investment research and portfolio construction. He has completed a Diploma in Financial Services and a Bachelor of Business (Finance). Luke has over 7 years of experience in equities market research and trading |
Separately Managed Accounts & Fossil Free Investment
What is a Separately Managed Account (SMA)?
SMAs are funds that are being created by advisory groups to more closely represent their client’s financial goals. Effectively a SMA allows ethical advisory groups to put together what they see as an ideal fund for most of their clients. SMAs can hold a lot of different investments that can be easily tailored to suit individual clients.
For example, Ethical Investment Advisers (EIA) has a SMA that is fossil fuel free and that obviously suits a lot of our clients. In the fund are companies of varying sizes, although mostly medium to small, that are not directly involved in the extraction, exploration, production, refinement, marketing or storage of fossil fuels.
It also avoids investments in areas such as tobacco, gambling, mining, alcohol and weapons manufacture. Instead, the fund targets companies which are involved in positive environmental activities or that provide benefits to society, such as healthcare, renewable energy, energy efficiency, recycling and social welfare.
The fund consists of around 40 shares listed on the ASX and EIA publishes all of those shares online, so that investors can see what exactly they have invested in. It means that the fund is very transparent and the investor can be sure that the fund is ‘true to label.’
So why an SMA?
Instead of buying units in a managed fund or trust, when you purchase an SMA you are actually purchasing each individual investment. This gives you more transparency over the assets you own, as well as more control over capital gains tax and switching investments.
If an investor dislikes a particular company or group of companies in the SMA then he/she can ask that those shares be excluded from his/her account. In that way the investor has a unique fund which exactly matches their particular ethical values, whilst still investing the SMA.
This situation is not possible with standard managed funds, you either invest in all the shares in the fund or not at all. And if you object to a particular share, you only option is to appeal to the fund manager to disinvest. Also, managed funds often don’t publish the full list of underlying investments, and when they do, the published list can be out of date.
Because there often aren’t large fund managers running the SMA, fees can be lower than the general market and advisers can negotiate the fees with the client.
When compiling a fund many commercial fund managers start with a top down approach. They have a certain number of shares that they would prefer to have in their portfolio. These shares are generally the larger cap stocks and would be closely tracking the ASX 200. Then they would have to screen out some of the shares and their screens can be very fluid. So you are very dependent on the managers interpretation of what is ethical and whether they will compromise ethics for perceived security.
The SMA is generally built from the bottom up, that is the shares are selected on merit and do not necessarily track any particular index (although the EIA SMA is benchmarked against the All Ordinaries Accumulation Index). The SMA is also willing to invest in stocks that the commercial managers will disregard due to size. Quite often smaller companies have more growth potential and are in greener and in newer industries.
If you want to have greater transparency in your investments and greater control, then investing in an SMA gives you those opportunities.
SMAs give you the ability to have a spread of shares across many industry sectors without outlaying a huge amount of money. The spread of companies also gives you diversity and makes the fund less volatile.
Does it cost a lot?
SMAs tend to be cheaper to run and therefore lower cost to the investor. When shares are bought and sold they are averaged by the brokers, so that the brokerage on the sale of a share can be just a few cents per investor. SMA’s must be run on a platform (for example, Praemium, Hub24 or Netwealth) and they charge a fee for that service. The management fees charged by the SMA providers vary, but can be as low as 0.11% or as high as 1.5% per annum.
Can I have an SMA in my Superannuation?
It depends on your super fund. If you have a self managed super fund, then yes, and if your super is on one of platforms which offers SMAs. We recommend that you consult with your financial adviser prior to investing in a SMA.
SMAs are funds that are being created by advisory groups to more closely represent their client’s financial goals. Effectively a SMA allows ethical advisory groups to put together what they see as an ideal fund for most of their clients. SMAs can hold a lot of different investments that can be easily tailored to suit individual clients.
For example, Ethical Investment Advisers (EIA) has a SMA that is fossil fuel free and that obviously suits a lot of our clients. In the fund are companies of varying sizes, although mostly medium to small, that are not directly involved in the extraction, exploration, production, refinement, marketing or storage of fossil fuels.
It also avoids investments in areas such as tobacco, gambling, mining, alcohol and weapons manufacture. Instead, the fund targets companies which are involved in positive environmental activities or that provide benefits to society, such as healthcare, renewable energy, energy efficiency, recycling and social welfare.
The fund consists of around 40 shares listed on the ASX and EIA publishes all of those shares online, so that investors can see what exactly they have invested in. It means that the fund is very transparent and the investor can be sure that the fund is ‘true to label.’
So why an SMA?
Instead of buying units in a managed fund or trust, when you purchase an SMA you are actually purchasing each individual investment. This gives you more transparency over the assets you own, as well as more control over capital gains tax and switching investments.
If an investor dislikes a particular company or group of companies in the SMA then he/she can ask that those shares be excluded from his/her account. In that way the investor has a unique fund which exactly matches their particular ethical values, whilst still investing the SMA.
This situation is not possible with standard managed funds, you either invest in all the shares in the fund or not at all. And if you object to a particular share, you only option is to appeal to the fund manager to disinvest. Also, managed funds often don’t publish the full list of underlying investments, and when they do, the published list can be out of date.
Because there often aren’t large fund managers running the SMA, fees can be lower than the general market and advisers can negotiate the fees with the client.
When compiling a fund many commercial fund managers start with a top down approach. They have a certain number of shares that they would prefer to have in their portfolio. These shares are generally the larger cap stocks and would be closely tracking the ASX 200. Then they would have to screen out some of the shares and their screens can be very fluid. So you are very dependent on the managers interpretation of what is ethical and whether they will compromise ethics for perceived security.
The SMA is generally built from the bottom up, that is the shares are selected on merit and do not necessarily track any particular index (although the EIA SMA is benchmarked against the All Ordinaries Accumulation Index). The SMA is also willing to invest in stocks that the commercial managers will disregard due to size. Quite often smaller companies have more growth potential and are in greener and in newer industries.
If you want to have greater transparency in your investments and greater control, then investing in an SMA gives you those opportunities.
SMAs give you the ability to have a spread of shares across many industry sectors without outlaying a huge amount of money. The spread of companies also gives you diversity and makes the fund less volatile.
Does it cost a lot?
SMAs tend to be cheaper to run and therefore lower cost to the investor. When shares are bought and sold they are averaged by the brokers, so that the brokerage on the sale of a share can be just a few cents per investor. SMA’s must be run on a platform (for example, Praemium, Hub24 or Netwealth) and they charge a fee for that service. The management fees charged by the SMA providers vary, but can be as low as 0.11% or as high as 1.5% per annum.
Can I have an SMA in my Superannuation?
It depends on your super fund. If you have a self managed super fund, then yes, and if your super is on one of platforms which offers SMAs. We recommend that you consult with your financial adviser prior to investing in a SMA.