November 2016
Using SMAs to build better client outcomes
Solutions for delivery of a suite of core equity strategies via SMA Model Portfolios
Max Cappetta, CEO, Redpoint Investment Management
The drivers of the SMA wave
Investor adoption of SMA model portfolios continues to be a massive trend. Advisers and investors acknowledge that SMAs are an effective mechanism for melding the benefits of direct beneficial share ownership with professional investment management. The range of strategies available via SMA is growing quickly with strategies moving beyond domestic equities to global equities, fixed income and other direct assets. This broadening of the range of available strategies is likely to bring the SMA market to a new growth tipping point allowing investors to use an SMA structure for larger proportions of their portfolios.
While the SMA structure has many tax and transparency benefits, ultimately, SMAs are a vehicle for delivery of investment outcomes. Building effective strategies for implementation via a SMA structure is a key challenge now facing investment managers and platform providers: it also presents a major opportunity.
Building well-structured core strategies for SMA implementation
There are many philosophies regarding how best to structure investment portfolios. A core & satellite approach using both passive and active strategies is amongst the most common. Diversified passive strategies can provide broad exposure at low cost while complementary active satellites can further improve outcomes.
A key characteristic which all SMA strategies must adhere to is to be reasonably concentrated, rarely holding more than 50 securities. This is such that clients with small investment balances can still have the SMA Model Portfolio faithfully implemented. Most active strategies generally meet this constraint, however highly diversified passive strategies cannot.
One solution may be to continue to use ETFs and/or managed funds as core exposure vehicles; but this simply dilutes the tax and transparency benefits of the SMA structure. Some model providers offer simplistic strategies to provide, say, the top 30 companies in a benchmark as a proxy for the passive index; this approach is likely to come with unintended biases that could lead to poor outcomes.
Redpoint believes a significant opportunity exists to deliver scalable, flexible and implementable core solutions specifically designed & constructed for the SMA market. Building core portfolios for SMA implementation requires the combination of three critical investment elements:
The drivers of the SMA wave
Investor adoption of SMA model portfolios continues to be a massive trend. Advisers and investors acknowledge that SMAs are an effective mechanism for melding the benefits of direct beneficial share ownership with professional investment management. The range of strategies available via SMA is growing quickly with strategies moving beyond domestic equities to global equities, fixed income and other direct assets. This broadening of the range of available strategies is likely to bring the SMA market to a new growth tipping point allowing investors to use an SMA structure for larger proportions of their portfolios.
While the SMA structure has many tax and transparency benefits, ultimately, SMAs are a vehicle for delivery of investment outcomes. Building effective strategies for implementation via a SMA structure is a key challenge now facing investment managers and platform providers: it also presents a major opportunity.
Building well-structured core strategies for SMA implementation
There are many philosophies regarding how best to structure investment portfolios. A core & satellite approach using both passive and active strategies is amongst the most common. Diversified passive strategies can provide broad exposure at low cost while complementary active satellites can further improve outcomes.
A key characteristic which all SMA strategies must adhere to is to be reasonably concentrated, rarely holding more than 50 securities. This is such that clients with small investment balances can still have the SMA Model Portfolio faithfully implemented. Most active strategies generally meet this constraint, however highly diversified passive strategies cannot.
One solution may be to continue to use ETFs and/or managed funds as core exposure vehicles; but this simply dilutes the tax and transparency benefits of the SMA structure. Some model providers offer simplistic strategies to provide, say, the top 30 companies in a benchmark as a proxy for the passive index; this approach is likely to come with unintended biases that could lead to poor outcomes.
Redpoint believes a significant opportunity exists to deliver scalable, flexible and implementable core solutions specifically designed & constructed for the SMA market. Building core portfolios for SMA implementation requires the combination of three critical investment elements:
Investment Insight
Building SMA strategies using a subset of companies from a benchmark requires that many assets are not held. This task automatically takes all strategies into the realm of active management. As we start de-selecting companies we immediately add active risk, or tracking error. This required de-selection is an opportunity to incorporate investment themes and criteria such that the active risk that must be borne also has some expectation for adding value in the long run and/or meeting a specific objective.
A systematic approach is well suited to this task. Redpoint has developed a range of stock selection strategies for the Australian and global markets. These strategies underpin our enhanced and active equity strategies managed on behalf of institutional clients. Our capabilities include valuation, sustainable quality, growth, analyst drivers, price momentum and news events.
These stock selection strategies are the result of our team’s aggregate investment experience. Continuing research and development of these concepts, and others, are central to our business. Other objectives and themes can also be considered, for example: lower volatility portfolios, income portfolios, sector specific strategies, etc. Since inception, Redpoint has incorporated environmental, social and governance (ESG) criteria into its investment approach. Along with social responsibility, ESG is a growing theme that investors are demanding. Being able to cater for a range of different objectives is a core strength of Redpoint’s investment capabilities.
Risk controlled portfolio construction
Portfolio optimisation, expertly handled, is required to ensure that unintended bets are mitigated while making better trade-offs between value add, costs and other necessary constraints. Left to its own devices, portfolio optimisers can induce excessive trading and or unnecessary small trades.
Redpoint’s team includes highly skilled investment professionals with decades of portfolio construction and optimisation experience. These capabilities are used to manage a range of domestic and global equity strategies for clients every day.
Focused portfolio management
A prime feature of the SMA Model Portfolio approach is that investors can directly access professional portfolio management services with advisers benefitting from greater business efficiency of not having to manage direct equity holdings. The SMA structure allows for portfolio management oversight to handle corporate actions, index changes and other events.
Redpoint is well placed to provide this service leveraging our global portfolio management and trade execution platform: purpose built to serve our institutional and retail client offerings. Regardless of where the trade execution occurs (SMA platform or with the model manager), Redpoint can cater for different operational environments in a seamless way. This makes Redpoint the natural choice to deliver a range of core SMA strategies to meet the growing needs of advisers and their clients.
Flexibility and scalability to meet various objectives
With increased investor sophistication comes the need to be able to provide a range of flexible solution to meet changing demands and cyclical themes. Redpoint’s range of stock selection strategies and global research resources is well placed to cater for these needs. Our portfolio design and construction capabilities can ensure that the constraints of SMA implementation are properly incorporated.
Being able to embed investment insight as well as test and develop new ideas is a competitive advantage of our capability. While simplistic SMA approaches may be susceptible to cost pressures and substitution, we believe that a smarter utilisation of investment knowledge can be a positive marketing edge while also delivering better long term outcomes for investors.
Summary
Redpoint believes that the SMA market can benefit from a suite of model portfolios that can act as core exposures for investors. The concentrated nature of SMA portfolios necessitates that model portfolios are active (relative to standard diversified benchmarks). Combining investment insight, risk managed portfolio construction and manager oversight is a path to building better outcomes for investors.
Redpoint’s global quantitative skills across stock selection, portfolio construction, management and trading make us a partner of choice to deliver valuable outcomes specifically designed and built for SMA implementation.
Risk controlled portfolio construction
Portfolio optimisation, expertly handled, is required to ensure that unintended bets are mitigated while making better trade-offs between value add, costs and other necessary constraints. Left to its own devices, portfolio optimisers can induce excessive trading and or unnecessary small trades.
Redpoint’s team includes highly skilled investment professionals with decades of portfolio construction and optimisation experience. These capabilities are used to manage a range of domestic and global equity strategies for clients every day.
Focused portfolio management
A prime feature of the SMA Model Portfolio approach is that investors can directly access professional portfolio management services with advisers benefitting from greater business efficiency of not having to manage direct equity holdings. The SMA structure allows for portfolio management oversight to handle corporate actions, index changes and other events.
Redpoint is well placed to provide this service leveraging our global portfolio management and trade execution platform: purpose built to serve our institutional and retail client offerings. Regardless of where the trade execution occurs (SMA platform or with the model manager), Redpoint can cater for different operational environments in a seamless way. This makes Redpoint the natural choice to deliver a range of core SMA strategies to meet the growing needs of advisers and their clients.
Flexibility and scalability to meet various objectives
With increased investor sophistication comes the need to be able to provide a range of flexible solution to meet changing demands and cyclical themes. Redpoint’s range of stock selection strategies and global research resources is well placed to cater for these needs. Our portfolio design and construction capabilities can ensure that the constraints of SMA implementation are properly incorporated.
Being able to embed investment insight as well as test and develop new ideas is a competitive advantage of our capability. While simplistic SMA approaches may be susceptible to cost pressures and substitution, we believe that a smarter utilisation of investment knowledge can be a positive marketing edge while also delivering better long term outcomes for investors.
Summary
Redpoint believes that the SMA market can benefit from a suite of model portfolios that can act as core exposures for investors. The concentrated nature of SMA portfolios necessitates that model portfolios are active (relative to standard diversified benchmarks). Combining investment insight, risk managed portfolio construction and manager oversight is a path to building better outcomes for investors.
Redpoint’s global quantitative skills across stock selection, portfolio construction, management and trading make us a partner of choice to deliver valuable outcomes specifically designed and built for SMA implementation.
Important information : This communication is provided by Redpoint Investment Management Pty Limited (ABN 83 152 313 758, AFSL 411671) (Redpoint). The information in the communication is of a general nature only and is not financial product advice. The communication is not intended to offer products or services provided by Redpoint or its affiliates. Opinions constitute our judgement at the time of issue and are subject to change. Neither Redpoint nor its employees or directors give any warranty of accuracy or reliability, nor accept any responsibility for errors or omissions in this communication.