Tag Archives: Alliance Bernstein

How managed accounts are redefining the independent advice market – 2 June 2014

For many years, the managed account industry has promised so much, but has failed to really fire, when compared with the incumbent administration solutions provided by the wrap and masterfund platforms. As an industry participant, this has never really made sense to me because managed accounts seem like such a sensible evolution in the provision of administration and asset management services in a world where transparency, portfolio customisation and individual tax management are such important requirements for investors. Especially those high net worth ones.

But alas, the structural reasons why managed accounts have not taken off are plain for all to see. It does not make immediate economic sense for the large wrap providers to cannibalise their dominant market positions by allowing access of these outside run managed account platforms for their planners to use, when those planners are owned by the same entities that own the wrap platforms – they will get there when they have to.   But in fairness to the existing wrap administration providers, they do actually provide incredible functionality and integrated services (e.g. risk, non-super, super, pension, direct shares, family pricing, portfolio rebalancing and modelling etc).  That is, they work very well for both advisers and their clients.

In addition to the structural reasons, advisers, even when faced with a ‘superior’ solution can be reluctant to change from one administration solution to another because of the costs it enforces on their business, and offering more than one is a headache that not even Panadol can cure, especially for smaller firms.

Lastly, whilst the managed account platforms are right for some clients, they may not be right for all.  Consider the following Pros and Cons of the managed account platforms:-

Pros

  1. Beneficial ownership of the underlying investments,
  2. Portability of portfolios,
  3. The ability to manage for after tax outcomes,
  4. Full transparency of underlying holdings where SMA models and direct investments are held,
  5. Consolidated reporting,
  6. Can improve work flows for the adviser,
  7. Removes unit trust administration costs (but is replaced by managed account fees and charges),
  8. Real time reporting of performance, and
  9. No more ROAs where the dealer is appointed the investment manager or where using an external model manager.

 

Cons

  1. Not all corporate actions can be included e.g. institutional placements,
  2. Diversification challenges e.g. lack of hedge fund access and hard to use derivatives for risk management purposes,
  3. Execution risk i.e. from delayed implementation,
  4. Execution costs can be high although the better platforms have the industries lowest cost of execution (e.g. <5 bps after netting),
  5. An MDA Operator requires the adviser to go back to the client each year for their opt in to continue, while the service offered under a PDS does not require this,
  6. May not be able to report on legacy products,
  7. Not great for illiquid assets (although they can be reported on where a valuation can be provided),
  8. May not have a superannuation version of the managed account platform limiting the appeal to SMSFs only,
  9. May not be able to integrate life insurance options, and
  10. Very difficult to pass rebate discounts from investments managers back to the end investors (same for wrap accounts but not so for multi asset unit trusts).

 

Why is the time right now for managed accounts to have their time in the sun?

We all know the stats.   80% of the advice market is owned by the big four banks, AMP/AXA and IOOF/SFG, leaving just 20% of self licensees to fend for themselves in a FoFA environment where vertical integration is close to impossible to achieve.  The ability to clip the ticket across advice, platforms, dealers services and investment management puts these larger groups at a distinct advantage when compared to smaller groups, who may find that achieving similar outcomes very difficult to achieve on a standalone basis.

For small independent licensees, the ability to create a revenue generating funds management capability is simply a bridge too far to cross, given the capital intensity of creating a true multi asset portfolio management capability.

Come in managed accounts…

Managed accounts are enabling many independent groups to become investment managers by leveraging the managed accounts technology, balance sheet and regulatory frameworks, where those advisers can legitimately charge an investment management fee as the implemented model portfolio manager.

As such, for very little start up cost, an adviser who may have been running model portfolios on an existing wrap platform, (with the assistance of a research house or consultant), can now turn that capability into a new line of business with separate pricing and revenue streams by partnering with an appropriate managed account platform.

Importantly, these same vertical integration (and FoFA compliant) benefits can be achieved through the creation of multi asset unit trust structures, which has been achieved by groups like Fitzpatrick through their investment arm Atrium, Infocus, through Alpha, Centrepoint through Ventura and various dealers advised by Select in DMG, Profile, Stonehouse and MGD Wealth.  These unit trusts can exist on an advisers existing platform (albeit platforms have onerous requirements to get these trusts listed in general), which therefore requires less change in the advisers practice, however, many of the Pros listed above cannot be achieved in through this structure.

But if an adviser is to go down the route of becoming an investment manager, enabled by a managed account provider, it may require a rethinking of how advice is charged for. Traditionally, advisers have charged an asset based fee to cover all services (outside of risk), essentially creating a conflict between wealth invested and actual advice needs.  For example, a recontribution strategy should be priced for the time it takes to deliver and implement that advice, plus a risk premium to cover for PI, with investment management charged separately.  There should be no link between the two, although this has been the traditional model, and will be the most challenging aspect to deal with for any dealer wishing to become a legitimate investment manager, as an adjunct to their advice proposition.  In today’s markets, consumers want to understand what they are paying for and what they are getting for those fees.

The point of all this is to highlight that a change in one aspect of a business model will have an impact on another, hence why any change should be considered and planned for carefully.

Additionally, the large platforms are backed by companies with significant balance sheets, which allows them to continually reinvest – this advantage is not to be understated by any adviser who may be looking to make the change, from a business risk point of view.

Welcome to the Managed Accounts Arms Race

arms race

Given the independent market is small (and getting smaller), and given the incentives provided to move to the ‘dealer as the investment manager’ model, it is no wonder that the existing managed account providers have entered an arms race to capture that territory, before it is locked away.  This is sales bloodsport!

The combatants in this race include ASX listed Praemium and Hub24 and soon to be listed, and Thorney (also an investor in Hub24) and Perpetual backed OneVue and Managedaccounts.com.au, alongside the private players in Linear (who is part owned by Bendigo Bank) and Mason Stevens.  No doubt there will be consolidation in this sector in time to get true economies, but even at low relative funds under management, the listed players are now cash flow positive.

In addition to these hungry entrepreneurial groups, the big providers including BT, through their NextGen project, and Macquarie, are spending up big in order to offer multi asset managed account capabilities.  Netwealth may be ready for their launch later this year too.

Blow up risk?

The managed account providers have a lot to lose with any ‘dealer as the investment manager’ that decides to go off the ranch in terms of investment strategy – after all, they are taking the regulatory risk, as the issuer of the dealers PDS when offered as an MIS. I rate this risk as very low, however, because the managed accounts are assisting (and requiring) that the dealers create formal investment charters, performance objectives, asset class ranges, allowable investments and mandate limits.   Further, they are generally requiring the services of an experienced consultant to beef up the internal investment resources (which should be a new source of opportunity for smaller consultants – Ibbotson, Philo and Select are very active in this market already). Most importantly, the managed accounts monitor every trade and portfolio change to ensure they are within these limits at the asset, manager and individual security level, which they call ‘models’.

Who wins and who loses in this new world?

Based on the Pros listed above, the winners in this new world may include:

  1. Direct assets (e.g. cash, TDs, fixed income and Australian equities),
  2. Listed Investment Companies,
  3. Stock brokers and online brokers,
  4. Exchange Traded Funds,
  5. Fund managers who can deliver their IP in an SMA or IMA format,
  6. Smaller consultants,
  7. Any mFund listed managed fund, and
  8. High alpha and specialist managed funds (where liquid).

 

The losers may include: –

  1. Traditional managed funds (e.g. benchmark aware),
  2. Multi manager portfolios, and
  3. Wrap accounts (but not in my lifetime).

 

As always, the future is uncertain, however, it is my view that what was once a trend (and a potential opportunity) is now fast becoming an embedded business model for many self licensed dealer groups, which will assist them in sustaining their own businesses from these new sources of investment management revenue.  This can only be a good thing for competition and consumers.

Andrew Fairweather, Founding Partner and Managing Director

 

Is Inflation Really Gone Forever? 29 July 2013

In 2011, inflation in the US was expected to reach 2.4% by 2013, according to consensus estimates. But since then, consensus expectations for 2013 consumer price inflation in the US have fallen by nearly 100 basis points (b.p.) to 1.5%, with a third of the drop coming in the past three months. Similar trends have unfolded in China, with inflation expectations for 2013 dropping by 150 b.p. from peaks two years ago.

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Rising Rates: Time to Position, Not Panic – 15 July 2013

During May and June, the 10-year US Treasury yield soared by nearly one percent, and markets reeled. Instead of panicking, investors should make sure their portfolios are positioned effectively.

Even with the Fed planning to keep short-term rates nailed down for a while, our forecast is for generally higher rates ahead. While there won’t necessarily be a big leap like the one in the second quarter, investors should be positioning their bond portfolios for the reality of higher rates.

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Japan and the Euphoric Volatility Trap – 3 June 2013

Most people associate rising volatility with bearish market environments. In down markets, mounting fears of further declines often prompt demand for put options, which protect against price declines. This demand causes the price of puts to rise and implied volatilities to increase. Here, the increase in volatility is due to fears of the downside, known in industry jargon as left-tail risk. Think of it as pessimistic volatility.

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Emerging-Market Debt Offers More Than One Kind Of Diversification – 3 April 2013

But there’s more than one kind of diversification, and more than one way to approach the opportunity, depending on each investor’s objectives.

There are two broad types of diversification. The first type, portfolio diversification, seeks to mitigate systemic, market-level (beta) risk. The second, issuer diversification, deals with issuer-specific (alpha) risk.

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Little Cyprus Sparks Contagion Fears – 22 March 2013

While the country may be too small to have a meaningful direct impact on the rest of the euro area, the big issue for markets is the potential for contagion to more systemically important countries.

Cyprus is a small economy, with nominal GDP last year of just €18 billion  (US$23 billion) or 0.2% of the euro-area total. So while Cyprus’s bailout may seem small in euro terms, it is huge relative to the size of its economy.

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Finding Value in Australian Equities – 1 March 2013

Fear and greed are commonly cited as motives for human behaviour, particularly when they lead to extreme movements in financial markets. Few would disagree that investor behaviour since 2010 has been characterised largely by fear, and that the effects of this powerful and (during this period) unusually sustained emotion remain deeply ingrained in markets, despite the rally in global equities during 2012. In our view, this fear has helped to create a once-in-a-generation value opportunity in the Australian equities market.

To read more, please visit the AllianceBernstein blog here.

Where to from here for Equity Markets? 30 January 2013

Given the Zero Interest Rate Policies (ZIRP) employed by most developed world central banks is driving up risk asset prices as investor search for yield and real returns and in an environment where the IMF is lowering global growth forecasts, the key question is where to from here for equity prices?

In terms of the managers Winston Capital Partners represent, Vadim Zlotnikov, Chief Market Strategist at AllianceBernstein, suggest that market participants need to pay more attention to pricing power in 2013 stating that,

“the big question investors must ask today is whether companies are capable of growing their profits ahead of expectations in a challenging market environment. According to consensus estimates, nominal GDP growth for 2013 is expected to be almost exactly the same as last year in almost every region. That means investors shouldn’t hold their breath expecting economic growth to fuel sales. Indeed, analysts expect sales growth to decelerate—yet they also forecast an acceleration of earnings. In other words, the market thinks companies are capable of boosting profit margins.

In a sluggish sales environment, we think pricing power—the ability to increase the mark-up on materials and labor— is really the key to unlock more earnings, (however), this may be easier said than done. According to our analysis, inventories have been building up across the globe, and in almost every industry from autos to telecoms, (making) it much harder for companies to charge more for their products…”

In a similar vein, Wayne Peters, Chief Investment Officer at Peters MacGregor Capital Management, agrees with Vadim in supporting those companies that have true pricing power suggesting,

“the reality, as we see it, is that current rich market valuations are supported by record-high corporate profitability. In the case of the US, it is fair to assume some of the increased profitability is due to structural changes within the economy – outsourcing of low margin manufacturing to the developing world. But to some degree we believe profitability is being fueled by debt-funded demand – excess demand that, due to operating leverage, has the potential to cause a disproportionate contraction in profitability if and when government deficit spending is ultimately brought down to a sustainable level. Rather than thinking through the implications of reduced government spending and increased taxes in the medium term, we believe market participants have anchored squarely on the potential for short-term fiscal resolutions and given present rich equity values a ‘pass’!”
“…we remain firmly of the view that we are in a secular low-growth economic environment characterised by low asset returns (interest rates are universally very low and likely to stay so for some time), low growth, and prone to shock. A focus on owning quality financial assets with pricing power and good long-term prospects remains of paramount importance!…”

And lastly Dominic McCormick, Chief Investment Officer of Select Asset Management has started to position their Multi Asset Portfolios more defensively highlighting their,

“relatively cautious approach to 2013 following a strong rally in many asset classes from the pessimistic, attractively valued levels of late 2011 and mid 2012. While growing investor optimism and the chase for returns/yield can certainly carry markets higher in 2013, and major market weakness is not our central expectation, we do believe that some major market valuations are no longer cheap and now provide a lower “margin of safety” in an environment where investors are more complacent and a range of major global macro-economic risks could continue to weigh on markets. The most current of these is the lack of progress on a sustainable long term fiscal plan for the US, a situation we doubt will be adequately remedied by the upcoming debt ceiling/expenditure negotiations…”

Given these views, it might be time to review your portfolios, the underlying positions and think through what you might do differently.

Andrew Fairweather, Founding Partners and Managing Director of Winston Capital Partners