Andrea Theouli, Deputy Head of Research & Manager, Multi-Asset, Lonsec
The Australian managed accounts market has evolved considerably over the past decade. As the sector continues to mature, the conversation is shifting from adoption to accountability. Increasingly, the factors that differentiate managed account providers extend beyond portfolio holdings and historical performance to encompass governance, portfolio construction, implementation, transparency and the ability to consistently deliver intended investor outcomes.
Drawing on observations from Lonsec’s recent dedicated SMA Review program, this series explores the continued evolution of managed accounts and shares Lonsec’s perspective on several of the themes becoming increasingly important for advisers when assessing SMA solutions.
Throughout this series, I’ve explored how managed accounts have evolved and why governance, implementation and portfolio construction have become increasingly important considerations. The natural next question is how advisers should bring these themes together when assessing managed account solutions.
Historical performance remains an important component of any investment assessment. However, performance is ultimately an outcome of a portfolio’s philosophy, governance, implementation and investment process. It should therefore be viewed as one component of a broader due diligence framework rather than the sole determinant of portfolio quality.
As managed accounts continue to mature, comparing portfolios has become increasingly nuanced. Understanding why portfolios perform differently is just as important as understanding how they have performed.
Performance is an outcome, not an input
Performance remains one of the most visible characteristics of any investment solution. It is often the starting point for product comparison and understandably attracts significant attention from advisers and clients alike. However, performance itself provides only a retrospective view of what has occurred. It does not necessarily explain why those outcomes were achieved or whether they are likely to be repeatable under different market conditions.
Two portfolios may produce similar long-term returns despite following fundamentally different investment philosophies, governance structures and implementation approaches. Equally, portfolios pursuing similar objectives may experience materially different outcomes depending on their active risk, portfolio construction decisions or market positioning. Historical returns therefore represent an important observation but rarely provide a complete picture.
Increasingly, advisers are seeking to understand the characteristics that sit behind those outcomes, recognising that repeatability is often underpinned by investment discipline rather than individual periods of strong performance. Performance remains an important part of the conversation. It should not, however, be the entire conversation.
Comparing managed accounts is becoming increasingly nuanced
One of the consequences of a maturing SMA market is that comparisons are becoming more complex. On the surface, two portfolios may appear remarkably similar. They may share comparable strategic asset allocations, investment objectives or even hold many of the same underlying investments. Yet realised client outcomes may differ for a variety of reasons.
Fees are an obvious consideration, but they represent only one part of the equation. Portfolio implementation, platform functionality, cash management, transaction costs, execution timing and tax outcomes can all influence realised investor returns. Similarly, benchmark selection, active risk and portfolio objectives may result in performance differences that are entirely consistent with a manager’s stated investment philosophy. This is particularly relevant when comparing managed accounts across different platforms. While the underlying investment model may be identical, differences in trading processes, rebalancing methodologies or platform capabilities may influence implementation outcomes.
Comparisons therefore require context. Rather than asking why one portfolio outperformed another over a particular period, advisers should increasingly ask whether those differences are consistent with each manager’s philosophy, implementation approach and intended client outcomes.
Understanding the drivers of performance is often more informative than simply observing the performance itself.
The best portfolio is the one that is fit for purpose
Perhaps the most important question an adviser can ask is not which portfolio performed best, but which portfolio is most appropriate for this client?
Managed accounts now span a broad spectrum of investment approaches. Some are designed as diversified core portfolio solutions intended to form the foundation of a client’s investment strategy. Others are intended to complement existing portfolios through specialist exposures or higher conviction investment ideas. Some prioritise capital growth, while others focus on income generation, downside risk management or retirement outcomes. Similarly, portfolios may differ materially in their level of active risk, implementation complexity and use of specialist investment techniques. None of these approaches is inherently better.
The more relevant consideration is whether the investment philosophy, portfolio construction and implementation approach align with the client’s objectives, investment horizon, risk tolerance and broader financial circumstances.
Suitability therefore extends well beyond risk profiling.
It also requires advisers to understand the role an SMA is intended to play within the overall portfolio, whether as a core diversified solution, a satellite allocation or a specialised investment capability designed to meet a particular client objective.
Increasing sophistication has expanded adviser choice. It has also increased the importance of understanding the purpose each solution is intended to serve.
Research informs decisions, it does not replace them
Independent research remains an important component of the investment selection process. Research assists advisers by providing independent analysis of investment capability, governance, portfolio construction and broader organisational considerations. It can help identify strengths, risks and areas warranting further consideration. However, research should not be viewed as a substitute for adviser judgement.
The Best Interests Duty requires advisers to understand the investment solutions they recommend and to satisfy themselves that those recommendations remain appropriate for individual client circumstances. Independent research therefore forms one input into a broader advice process that also considers client objectives, portfolio construction, implementation considerations and suitability.
As the managed accounts market becomes increasingly sophisticated, adviser understanding becomes increasingly important. The objective is not to become an investment manager. Rather, it is to develop sufficient understanding to explain why a portfolio has been selected, how it is intended to achieve its objectives and why it remains appropriate for the client over time.
Conclusion
The Australian managed accounts market has reached a point where success is no longer defined simply by adoption or scale. As portfolios become increasingly sophisticated, long-term differentiation is likely to be determined by the quality of governance, portfolio construction, implementation and transparency supporting investor outcomes.
For advisers, this evolution presents both an opportunity and a responsibility. The opportunity lies in access to an increasingly diverse range of high-quality investment solutions capable of supporting different client objectives.
The responsibility lies in understanding those solutions beyond historical returns alone. Looking beyond returns does not diminish the importance of performance. Rather, it recognises that long-term investor outcomes are shaped by the quality of the decisions, governance and implementation that sit behind those numbers.
As the managed accounts market continues to evolve, the advisers best placed to support their clients will be those who understand not only what a portfolio has delivered, but also how and why those outcomes have been achieved.
Important Information: This article has been produced by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No. 421445 (Lonsec). Generation Development Group Limited ABN 90 087 334 370 is the parent company of Lonsec Research.
Warning: The content presented in this article is for informational purposes only and is not a prospectus, product disclosure statement or any other form of disclosure document within the meaning of the Corporations Act 2001. Any express or implied rating or advice presented in this article is limited to “general advice” (as defined in the Corporations Act 2001 (Cth)), without taking into account the investors’ objectives, financial situation and needs. Prior to acting upon any information presented in this article, advisers must do their own investigation and analysis of the appropriateness of the information for their investor, having regard to their objectives, financial situation and needs.
Disclaimer: Lonsec Research have provided this article for exclusive use of its clients. It is not intended for use by a retail client or member of the public and should not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this article. Lonsec Research assumes no obligation to update this article following publication. Except for any liability which cannot be excluded, Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this article or any loss or damage suffered by the viewer or any other person as a consequence of relying upon it.
