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SMA Redemptions Exceed Funds


Cerulli Associates has launched a new separately managed account product that aims to provide clients with access to key industry metrics, data and analysis. The Boston-based research firm introduced Quantitative Update in late July to complement its wide range of products and services geared toward covering the managed account industry.

The inaugural edition of the product takes an in-depth look at the managed account business using information collected from a pool of asset managers. The 120-page study revealed that redemption rates among separate accounts are actually higher than that of equity mutual funds. It has been oft-reported in the press and suggested by members of the financial services industry that separate account assets are stickier than mutual fund assets due to their client profiling, asset allocation, customization and ongoing monitoring features.

But the Cerulli report paints somewhat of a different picture. A survey of asset managers showed a separate account redemption rate of 32.8%, and an analysis of a publicly traded program sponsor points to a 30.8% redemption rate. That compares to the current average equity fund redemption rate of 26.8%, as reported by Washington-based trade association Investment Company Institute.

Furthermore, the SMA marketplace continues to exhibit symptoms of being a "hot dot" in terms of the flow of investor assets. To illustrate that point, Cerulli referenced the disparity between stocks and bonds. The net level of assets invested in fixed-income funds increased 79% between the third quarter of 2001 and the fourth quarter of 2002.

While 2002 was a rough year for equity returns - having lost more than 20% of their value - and a strong one for bonds, which posted a 10% gain, the returns alone do not account for the shift in assets. Clearly, it was a case of investors chasing high-performing asset classes such as fixed-income, Cerulli said. Its team of analysts believes that a majority of the shift in assets was the result of a reactionary rather than a prescient move by investors.

The report identified operational issues as the biggest challenge to profitability for investment managers currently participating in the consultant program business. Despite a lot of rhetoric about establishing a uniform operational system or uniting the exchange of information between sponsor and managers, there are no industry cure-all remedies to date, Cerulli said. However, in comparison with efficiency metrics from the previous year, Cerulli analysts believe significant improvements have been made on that front.

For example, Curian Capital currently markets managed accounts to financial advisers through an entirely paperless investment platform (see MME 7/28/03). The Denver-based company's Web-based system enables clients and their designated financial advisers to gain instant access to their account information and all relevant documents. The platform has successfully shifted the administrative responsibility away from money managers to the plan sponsors, leaving managers free to focus solely on running the portfolio. Managers do not have to worry about cash flow, opening new accounts or account maintenance. And they don't have to build external infrastructure or hire internal administrative help for account maintenance purposes.

Another key finding is that the top 25 separate account organizations, including holding companies and proprietary asset managers, account for 64% of industry assets. While these top dogs represent a concentration of assets, managers ranked 51 through 100 among third-party manager programs control a mere 3% of assets. So while there are a few heavy hitters at the top of the lineup, the asset management landscape remains highly fragmented, Cerulli said.

SMA assets under management rose 15% in the second quarter, moving one step closer to the industry's prediction of $1 trillion in assets by 2006.

Industry-wide assets totaled $442.86 billion, up from the $384.86 billion at the end of the first quarter, according to Money Management Institute, an SMA industry trade group based in Washington.

"While rising asset values clearly played a role in the increase in industry assets under management during the second quarter, the industry also has been distinguished by a relatively stable asset base during even the most volatile market periods of the last two years," said Scott Sipple, senior vice president and managing director for Alliance Capital. Sipple is a member of MMI's board of governors.

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