SMAs Turned Mutual Funds

Terry Flanagan

Though institutions have traditionally favored separate managed accounts, mutual funds may ultimately reign supreme for mass investors.

Separately managed accounts (SMAs) have traditionally been wildly popular among institutional investors. Prized for their personalization, and ability to customize a relationship between a single investor and investment manager, the vehicle has been able to house more esoteric, narrowly-crafted strategies.

Yet, more and more firms are turning their SMAs into broad-based mutual funds—a vehicle more suitable for retail investors and financial intermediaries. AIG spin-off, PineBridge Investments recently turned their merger arbitrage strategy from lone SMA strategy into a U.S. based mutual fund.

Innealta Capital, a 1.7 billion quantitative asset manager also has recently launched two new mutual funds based on its two most popular separately managed account offerings: the Innealta Capital Country Rotation Fund—which employs tactical asset allocation investing in the risk/reward potential of up to 20 countries, and the Innealta Capital Sector Rotation Fund—which invests in the risk/reward characteristic of up to 10 economic sectors.

For Innealta, budding demand for wider distribution served as the catalyst for the switch.

“We’re finding distribution is getting more and more complex,” said Scott Silverman, senior vice president of business development at Innealta. “We want to be agnostic during our investment process and just bear in mind that when we’re manufacturing our products, we want a structure that meets the needs of what distribution demands.”

The firm’s clientele has largely grown out of the financial intermediary space, thus making mutual fund distribution a suitable choice. In a move to make the firm’s two most popular strategies widely available, Innealta hopes to attract the retirement plan space.
Moreover, there can be perils to the separate managed account structure.

“SMAs can be a blessing and a curse…if not managed effectively, you can become distracted from the overall allocation,” Silverman said.

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