Separately managed accounts, considered our nation's hippest new investment product, slowly have been gaining traction overseas as Japanese brokerages have begun to dip their toes in the pool.
Recently, Daiwa Securities, Japan's second-largest brokerage firm, announced that it will launch an SMA program with the hopes of capturing $270 million to $450 million from high-net-worth clients. That move comes on the heels of rival Nikko Cordial, Japan's No. 3 brokerage, becoming the first Japanese outfit to enter the fray in April, when it announced its partnership with FOLIOfn to offer products modified from the wrap account developed in the 1970s in the United States.
Given that many Japanese investors steer clear of investment vehicles such as mutual funds, it will be quite challenging for these firms to market their new products. However, Japan is in the process of easing regulatory constraints on its banking sector, something that will likely stimulate more competition. The Japanese government is also promoting the development of accounts similar to 401(k) plans in the U.S. That, coupled with rising consumer confidence and a more optimistic market outlook, have fueled interest in delivering a managed portfolio of stocks to wealthy investors.
Still, the Japanese people remain reluctant to participate in the stock market as evidenced by the paltry 12% of the population that own mutual funds. But Nikko Cordial CEO Yoshi Saigusa is betting that the transparency of the product and a shift toward a less-regulated marketplace will help garner new assets for its SMA program.
Assets held in international managed accounts totaled more than $260 billion at the end of 2002, according to research firm Cerulli Associates of Boston. Cerulli forecasts that these assets will grow to $390 billion by 2007, an average annual 8% growth rate. That compares to $506 billion in the U.S. at the end of 2003. U.S. assets are expected to exceed the $1 trillion mark by the end of 2007.
"There's not a great deal going on in the international market other than Japan and Australia," said Shiv Taneja, a senior analyst in Cerulli's London office. "We track it more as an adjunct to what's happening in the U.S. rather than a standalone channel in the international marketplace."
He noted that the Australian market, despite having several years under its belt, hasn't quite taken off in the manner that some of the companies there would have suspected, and that Japan, while it is looking at managed accounts seriously, is still in its infancy stage. In Europe, variations of the SMA have been developed, but nothing substantial has ever really materialized. "This is where we would have hoped to see a little bit more activity," Taneja said.
Because managed accounts outside the U.S. are in different stages of development, there are a number of different terms used to describe them. The four main program types include mutual fund advisory, separate account consultant, fee-based brokerage and rep-as-portfolio manager. Mutual fund advisory programs are the most popular because of the strong tax benefits found in a mutual fund structure.
But managed accounts across the pond are somewhat of a different animal. "There's a difference in the way they're administered, the way that they're run and how they look and feel," Taneja said. He pointed out that the private-client marketplace in the U.K. caters to the mass affluent and the high-net-worth. It's not exactly the traditional private-banking market, but rather closer to sort of an in-between marketplace, one that has anywhere from $50,000 to $3 million or $4 million of assets per client.
Taneja argued that managed account programs abroad have not fared as well because of two fundamental reasons. The first is that the tax laws and securities market structures are different. In the U.S., tax laws favor SMAs over mutual funds. Internationally, it's actually the reverse.
"Generally speaking, in most of Europe and large parts of Asia, there are far bigger tax breaks associated with mutual funds than there are with a portfolio of stocks. Any capital gains that are taken by the fund manager within a mutual fund are exempt from capital gains tax until such time when the investor sells the mutual fund," Taneja said. "What happens within the parameters of the mutual fund there are no capital gains whatsoever."
In the States it's quite different, in that the investor gets socked for capital gains. An investor who has only been in a fund for even a short period of time has a potential liability for fairly high capital gains, which makes this a relatively unattractive proposition for certain types of investors.
A second prohibitive factor is that there isn't the same cache that exists in the U.S., giving retail investors access to institutional money managers. "It's not such a big deal," Taneja said. "Retail investors don't get so hung up about the fact that there is an institutional manager running an SMA because most well-known institutional managers in Europe already offer mutual funds."
Tax efficiency and institutional appeal notwithstanding, technology presents a huge obstacle for many foreign firms. Taneja continued. "We just don't have the technology available internationally to manage all of the things that occur in the SMA construct, he said. "That's not to say people aren't interested in developing it, but I think it's fair to say we're a long, long way away from getting anywhere near where the U.S. market is in terms of technology."
He believes that Australia will likely experience the most success in growing its separately managed account business because its system is not dissimilar to the U.S. Japan is also becoming more aligned with the U.S. from a regulatory standpoint. Taneja suggests that overseas firms focus on delivering service to the client and worry less about what it looks like.
The best approach, in his opinion, would be to extract some of the basics of SMAs in the States and tailor them to fit each country's own infrastructure. He stressed the importance of incorporating the following attributes into the program: client profiling, asset allocation, portfolio rebalancing, accounting recordkeeping and reporting, and a single asset-based fee. "I am much less concerned about what the bucket looks like. I am much more concerned with what the attributes in the bucket are. If you can provide these attributes it doesn't matter what you call it."
