In the latest sign that separate accounts are truly going mainstream, Morningstar launched a new star rating system for the investment class Thursday. Some said the new service could ramp up interest in the already rapidly growing separate accounts industry particularly at a time when mutual funds are engulfed in a regulatory scandal.
"I think it could encourage more investors to go to separate accounts," said Tom Meyer, CEO of Meyer Capital, an independent advisory shop in Marlton, N.J., with $200 million in assets under management. "Anything that would help them to use these would make them more attractive."
Morningstar began providing research on separate accounts about a year ago, and now has some 2,700 separate accounts in its database.
Now, a rating of one to five stars will go to 1,200 of these separate accounts all those that have filed at least three years of consecutive monthly returns and that have at least five separate accounts. The stars will be applied based upon past performance in terms of both return and risk. The separate accounts will also get a separate flexibility rating based upon more than a dozen features that allow for customization, such as the ability to exclude certain securities from an account, modify sector weightings, harvest tax losses or analyze specific trades.
Morningstars separate account database represents approximately 90% of the entire retail market and 60% of the institutional separate account market by assets and number of composites. A one-year subscription to the Morningstar Principia Separate Accounts database, which provides access to the ratings, costs $1,395 and includes four quarterly updates.
However, one separate accounts management firm said they worried that the star rating system might oversimplify the investment class, reducing it to a product rather than a process. "For as long as modern-day investing has been around, people have tended to look for the simple answer," said Jack Sharry, president of the Private Client Group of Phoenix Investment Partners, one of the largest multi-manager firms in the managed account arena.