So I just finished going through a list of a few hundred different mutual funds. Something I noticed about a lot of the boutiques is that mutual funds aren't their bread and butter business. For example, a good chunk of them had say ~$100 million AUM in their own mutual funds, but had $1 billion+ AUM from SMAs and sub-advised accounts. How would working at one of these places differ from working at a true mutual fund company?
I know a lot of people view SMAs as more of a PWM type of thing but a lot of the ones I came across are institutional SMAs (e.g. pension funds, endowment funds, etc). I assume SMAs in PWM is more of a sales gig, whereas institutional SMAs are more research focused.
I think you're a bit confused. SMAs are just a type of investment vehicle, as are mutual funds. A lot of firms offer products in both SMA and mutual funds format. For example, a small retail client might but into a firm's mutual fund for a given product (i.e. "Fidelity U.S. small cap growth fund"), whereas a high net worth client might invest in the same product using a SMA. You are still buying into the same fund strategy.
From the research team's perspective, it generally doesn't matter what type of vehicle is being used. The portfolio manager or investment committee constructs a model portfolio and then client portfolio managers ensure that the various investment vehicles match the model portfolio as closely as possible.
Some/many SMA clients have various restrictions, i.e. not investing in tobacco stocks or whatever, so in some cases the SMA accounts will differ from the model portfolio. From the client's perspective, there can be many benefits to using a SMA vs. mutual fund, but in general it is more expensive for firms to offer SMAs, hence why SMAs are restricted to larger clients.
Thanks @models_and_bottles for the clarification. Do you know if AM firms like Fidelity and JPMAM ever manage unique portfolios for large clients (i.e. a portfolio not based on any existing fund)?
You bet. The larger the client the more bespoke the solution could be. I've seen accounts with custom benchmarks because the client wanted to exclude certain countries or industries, or alternatively require dividends or a certain ESG rating. The most customized would be a LDI solution which is geared towards pension and insurance clients.
Wow that's interesting and rarely talked about. Do you know what the team structure is like for these bespoke solutions? Is it basically PMs responsible for a few portfolios each, with AM equity and fixed income analysts pitching investment ideas to these PMs?
Also, are there any roles in AM involving advising institutional clients on their portfolios and recommending investment ideas (i.e. non-discretionary), similar to how there are people in private banks recommending investment ideas to UHNW clients?
There would be a PM responsible and he/she would select investments recommended by the analysts that fit the client's criteria. Most firms have internal systems that record analyst recommendations and flag the recommendation's eligibility by product, so effectively the PM has a menu to choose from.
The latter of what you're suggesting is more like the role of an OCIO or consultant. They're generally not pitching individual investments though, but instead making recommendations about asset allocation or manager selection. It's not like a $10bn pension randomly hires consultants to tell them to buy Google or something.
Yes - our business is massively geared towards SMA's -significant portion of our assets (think $100b + in AUM). These range from quite large - to very small. So small most firms would not bother with them. In all cases - they come to us because we offer basically a bespoke solution to their needs - which is generally driven by the assets themselves. We aren't talking sleeves of pension funds for a core fixed income mandate - think customized liquidity solutions for fixed income portfolios. Operating funds for a health care system (non-endowed monies), as an example. There's quite a range - they could come to us for ESG considerations, cash flow needs, extremely restrictive Investment Policies, etc. But yes, there's a considerable market for this type of setup. We also have funds, and other commingled strategies available as well to supplement this business.
In our case, the relationship managers are very heavily involved in setting the strategy, objectives and working with our PM's and Traders to execute. Our systems, as mentioned earlier, obviously take all the IP constraints into account - and off we go. The nice part about the business is that we have a pretty niche-y client set so we can scale our expertise across those SMA's which makes it work. We have a similar setup to most asset managers - PM's, research analysts, strategy folks, etc. who all work on the assets.
For the advising side? Yes - it's either an investment consulting arrangement or, as mentioned, an OCIO relationship.
For the former - it's a wide spread. It ranges anywhere from a whilshire type who will review a pension funds manager lineup, asset allocation, investment policy - and 'advise' the board on what to do, etc. It could also range from a smaller, niche consultant who specializes in the selection of specific managers, investments, asset classes, portfolio types - who has expertise to help advise on a range of things.
An OCIO is a consultant with discretion - simply put, I help you setup your investment policy, then help you pick your allocation (i.e. 60/40), then your lineups (equities, FI, alts, etc.) and then I literally 'manage' those assets, tweak the allocation, hire and fire managers. Within that type of solutions - you can leverage SMA's to get customized exposure to various strategies (i.e. a concentrated, small cap portfolio with ~30 managers, or whatever), use mutual funds, etc.). In these scenarios - you are an 'advisor', who outsources the actual management.
Which is an important distinction within AM - there are those who literally manage the strategies, those that advise clients on strategies/allocation/decisions and then those that do both - or some mix - and it's very gray. You have huge banks who basically do anything and everything - from providing passive strategies, active strategies, advisory, etc. to smaller firms who may only provide the advice - and then use outsourced managed portfolios. Then you have the big guys, who also provide advice - but will use outsourced managers for portions of the portfolio to avoid conflicts - etc.
In other words, there's a lot going on. The really fun part is that there are some situations where the private banking/high net worth guys tread into the 'smaller' side of institutional accounts - you see some wild things when that happens. Think about small, 5 million or 10 million dollar portfolios for a foundation or whatever. That's where you can end up with a small team literally buying individual stocks in a portfolio (which, mind you, is generally not the right idea for an institutional investor - but I digress).
Keep this in mind, however - generally speaking firms don't like customized SMA's. It's resource intensive, challenging to scale and can be an operational nightmare execution wise. Much more enticing to have a really good, high performing 'strategy' where you can just drop in assets and keep going. Which is, of course, why firms will offer their strategies across multiple vehicles (mutual funds, separate account, commingled fund) vs. truly customizing something for a client. Much easier, IMO, to have a lineup of strategies - let others distribute it for you - and focus on just performing.
models_and_bottles I understand that private banks often have "discretionary portfolio management" for clients. These essentially seem to be pooled multi-asset portfolios of varying risk tolerance levels offered to PB clients, managed by a PM(s). Would you know if these PMs typically sit within the PB or the AM division of the bank? And who (if any) are their research analysts?
Most likely in the PB division. I'm not sure exactly how they select the asset allocation but my impression is the banks have fairly rigorous guidelines. Again, it's not like these PMs are picking stocks, instead it would be like "25% of portfolio in large cap US equities, 10% in midcap, 25% in long duration bonds, 10% in emerging markets" with potentially some element of manager selection involved.
That makes sense. Thanks a lot!
I was a Relationship Manager with Huntington Private Bank and our bank was divided into Regional Teams consisting of 1 Relationship Manager,(Basically a Private Client Advisor at JPM), 1 Estate Planning Attorney, 2 Analysts, 1 PM, 1 Mortgage Banker, 1 Private Banker. I may have forgotten someone but roughly.... you get the idea..... as the RM I established clients goals, expectations, needs, and basically played quarterback for the team for the clients service. Once my discovery meeting was completed I sent Investment Info to the WM Analyst. Liquid Deposits, Bank Instruments, and non mortgage lending needs to the PB, Existing Estate Docs and Trusts to the Atty, Housing to the MB, and waited for the Client Strategy Analyst to deliver me our proposal. I'd present the recommendations and establish accounts. The Investment $ then was deposited into the PM's AUM and once cleared I'd excute orders pro rata of tolerance. The PM basically had several accounts labeled Growth, Income, G&I, International, Commodity, Fixed, and Aggressive. Once he had the funds it was at his discretion to allocate as the $ amounts outlined by our objectives were allocated from my inital deposits to his various investment pools.
Now I know other PB's have different methods, and coming from IA the investment approach was unique to my previous experiences, but honestly I liked their method. The CPA's likely hated it, as it all seemed commingled to me but obviously it worked, and since I didn't calculate cost basis and etc i didn't give a shit lol.
Our AUM when I left the team was around 700mm but that included commerical notes, and secured deposits, so real investment volume was closer to 300mm, our team required minimum assets of 5mm, but some teams in the PB would accept as low a 1mm.
Tangent aside, the PM basically had 6 or 7 actively managed investment pools he invested freely permitting they were within the scope of the funds objective.
As the market adjusted clients holdings I'd rebalance the funds, but generally it was a money shuffle opposed to a wirehouse transaction with exception to the occasional unsolicited equity order
Speaking from an AM (Not WM) perspective, SMAs are normally for large institutional clients that get a strategy at a discount to the fund. We wouldn't talk to you about a SMA if the mandate was for less than $50m, and had clients like NYCERS and CalSTRS. Our average proposal was for $250-750m. Grinding for nickles and dimes in the retail fund is nice, but to hit a home-run like that we'd offer something like a 75% discount on the fee. You can't normally do that within the fund, and the client isn't normally a taxable entity, so you set up a SMA. These can be customized as needed, like excluding certain sin stocks, etc. It makes GIPS compliance more difficult, and reduces the discount, but for enough money you can do virtually anything.
People talk a lot about mutual fund fees coming down - It's terrifying on the SMA side. The discrepancies in pricing are all over the place. But, hey, assets are assets and scale matters. So do having large, 'marquee' clients. Even as grown ups, we are still high school kids who all want to hang out at the same cool kids table.
I hear that the big guys are paying less than 1 bp for bulk beta products in SMAs. (essentially that's free)
EDIT: For the record, I never cared about the cool kids table, but the senior section was cool. They had their own alcove, and got to control the stereo. As a frosh I would have killed to sit there.
Once I went private practice I realized 85-90% of my general allocations could be with ETF's, or Low expense MF's because of my smaller AUM, and client load. I finally went to fee based only and reduced the internal expenses so I could assume them to make my billing easier for clients to understand. I occasionally miss the big assets with Ivy and the PB, but I'm positive my 34mm AUM with 18 households is better served than before. and at 1.5% flat wrapped as an RIA I can't complain about much.
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