A nice complement

The number of advisers using managed accounts has exploded in recent years, while diversified managed funds have taken a back seat. But we believe diversified funds deserve a place in almost any multi-asset portfolio, held either within or alongside a managed account. At first glance, the two types of portfolios may initially seem similar in terms of client outcomes, but there are differences with their structure and research methods. Both diversified managed funds and diversified managed accounts are similar in terms of why advisers use them and what they are trying to achieve for the end client. Each product allows an adviser to effectively outsource investment selection and portfolio management to an external party. This means advisers can free up inefficiencies in their business and potentially get back some time. Ultimately, advisers want strong long-term returns for their clients with risks appropriately managed. It is important to remember, however, that the two products differ on a structural level.

Differences between managed accounts and managed funds

Firstly, managed accounts give the end client beneficial ownership of the underlying assets. That’s a benefit for clients who want that level of visibility and want to see transactions. With customised managed accounts, advice practices can retain some input in the decision-making process, if desired, regarding the investment portfolio. With a managed fund, however, the client owns units in the fund and transaction exposure is generally more limited. But one area where managed funds have the edge is comparability; managed funds are much easier to compare than managed accounts. They have one net performance outcome and one fee structure that is the same for all clients. Easy comparability makes it much simpler for advisers to conduct due diligence on the different offerings available. The consistencies enable advisers to compare products on a like-for-like basis more efficiently.

Managed accounts, on the other hand, are essentially a different product across each different platform. There will likely be different investment management fees, different trading rules and different investment performance outcomes for clients. Like-for-like comparison is difficult. Another benefit of diversified managed funds is the broader range of investment options available to them. For instance, if within the product’s parameters, managed funds can use a range of derivatives to help control risk at the portfolio level, including futures, forwards and options. When markets are expensive, derivatives really come to the fore. They enable the fund manager to invest in individual securities that show good value, while hedging away the risk that comes from a market that is trading high in aggregate.

Although managed accounts can invest in underlying managed funds that can use derivatives, they can’t hold them directly. Therefore, managed accounts cannot use derivatives to directly manage risks at a portfolio level. Advisers will know that protecting the downside is the key to happy clients.  Our Allan Gray Australia Balanced Fund is a multi-asset fund that invests in equities, fixed income, commodity-linked instruments and cash. The Fund also has the ability to use forwards and futures, to help manage risk.

The best of both worlds

As you can see, both managed accounts and diversified managed funds have their benefits. In recent years it seems that many advisers have decided to follow one approach or the other, but we believe these two products needn’t be mutually exclusive. They can actually work together in a client portfolio.  Using multiple multi-asset options is a great option for advisers looking to diversify decision makers and introduce differing views.

Not only could this reduce the risk of having all clients in a single investment approach, but it could also lead to better client outcomes as well. To learn more about how diversified managed funds can complement your managed accounts please speak to your local Allan Gray Relationship Manager, or visit our website to learn more about the Allan Gray Australia Balanced Fund.

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