IMAs and SMAs explained

PPM has recently extended its offering to include Separately Managed Accounts (SMAs) however the differences between Individually Managed Accounts (IMAs) and SMAs are perhaps not well understood.


Recently there has been much in the press in relation to the rise of SMAs as a ‘new’ investment product offering clients greater control and transparency as a direct managed investment product however the differences between IMAs and SMAs are perhaps not well understood. Hugh MacNally, PPM Chairman and Portfolio Manager sets out the key differences and benefits of each and explains why PPM has extended its offering to include SMAs.

An SMA is a product – each investor gets the same portfolio
Under an SMA – a client invests in a model portfolio managed by a professional investment manager, all administration and investment reporting is taken care of for the client by the platform administrator. The client’s financial adviser will assist the client in determining whether an SMA is suitable to meet their investment requirements and which SMA or SMA models to select.

Individually Managed Accounts
“You can think of an SMA like buying a quality suit of the rack, every suit is the same, few changes can be made. It is up to you to determine which best suits you. Whereas, as IMA is a fully tailored suit made to specifically for you.” commented Hugh MacNally.

There are clear benefits of an SMA for a client. An SMA provides access to a professional manager and its research capability with the benefits direct share ownership. Unlike a managed fund, each client is able to see exactly what investments are in their portfolio. Tax events and transaction costs are not shared across clients and the cost base of the clients investments will be the date of their investment in the model portfolio. As the model is administered on a platform, the client does not need to manage corporate actions or any administrative aspects of their portfolio. Clients receive online access to their model portfolio and annual reporting for taxation purposes. The client pays investment management and administration fees.

SMAs are suitable investment products for clients who want a direct investment portfolio without having to spend time, selecting, managing and monitoring their portfolios – as both the investment management and administration are handled by professionals. SMAs are offered for both general investment and superannuation. Clients can have their monthly employee superannuation contributions invested into an SMA. SMAs are a suitable solution for clients who want a direct investment portfolio but have not yet the super fund size to justify a SMSF. However, while SMAs can offer some limited tailoring they do not accommodate any differences in holdings between clients – all clients have the same model.

Why PPM launched SMAs
PPM is a specialist boutique investment manager with over 20 years’ experience in successfully managing client portfolios. The addition of SMAs to PPMs offering is a natural expansion of PPMs business, as they enable us to offer our investment management expertise to clients who either do not require individual portfolio customisation or who do not satisfy the Corporations Law definition of a ‘wholesale’ investor.

PPM’s SMAs are structured under a managed investment scheme with the appropriate disclosure provided in a PDS. All compliance and administration is taken care of by the platform provider. Clients in consultation with their financial advisers can determine what model would best suit their investment requirements and can invest in a PPM SMA with as little as $20,000 under the Australian Equities Growth Model or $50,000 for the Global Growth Model.

An IMA is a service – each investor’s portfolio is individual and tailored to their requirements
Whilst SMAs are newly popular, IMAs are not a new and yet they are perhaps not well understood. An IMA may be described as “bespoke” or “tailored to each client”, but what exactly does that mean? How does a Portfolio Manager construct an IMA – an Individually Managed Account?

First, the client will meet with the Portfolio manager to discuss their investment objectives, then in consultation with the clients advisers, will agree a core investment strategy (including a consideration of growth or income requirements, Australian and/or International equities) and their broader investment requirements. Each client will discuss their taxation status, investment restrictions, ESG considerations, and, if any existing holdings that are to be included in the portfolio. The Portfolio Manager wi

Individually Managed Accounts
IMAs are ‘tailor-made to measure’ to meet each investors’ needs.

ll then build a portfolio tailored to meet the client’s investment objectives and requirements and manage it going forward. In addition to quarterly and annual reports and the Portfolio Manager will meet with the client on a regular basis to discuss the portfolio(s) and explain any changes to it.

PPM is a specialist provider of IMAs
PPM is a specialist IMA provider and has a 20 year track record of constructing IMAs to meet the demands of sophisticated investors who want a tailored investment solution to meet their investment requirements. PPM Portfolio Managers meet with our Clients quarterly to regularly to discuss their portfolios. Reporting is available online 24/7 via a secure portal on our website.

We would be happy to meet with you to discuss your individual requirements to determine in conjunction with your advisers whether an IMA or an SMA is most suitable for you or your Clients

IMA examples
The best way to describe how an IMA works and is tailored to each clients requirements is to give examples:

Example 1 – The client has an existing portfolio that has large capital gains on stocks that might have been held for a considerable time, maybe they inherited some of the holdings, as such there are significant capital gains tax consequences if the holdings are sold. The client may also be a senior employee of a listed company has a large exposure to their employer stock through a staff share scheme. If for example this is a bank, the client may not want additional exposure through their portfolio or superannuation fund to that company. The PPM Portfolio Manager would consider both that capital gains implications and overweight position of the clients current holdings in the financial sector when constructing and managing their portfolio, they may carve out that exposure from the portfolio and thus give the client a more balanced and diversified overall portfolio.

Example 2 – The client has assets held both inside superannuation and outside in a family trust or in their personal name. In consultation with the client’s advisers and PPM Portfolio Manager it may be advantageous, if they are paying a high personal tax rate, to manage the clients ‘portfolio’ so that assets that are expected to generate long term capital gains are held in the family trust whilst the superannuation fund holds assets that are more likely to generate income (particularly franked). Thus the family trust might hold the majority of the US stocks (as they often generate capital gain rather than income) and the Superfund might focus more on domestic stock as they produce more income and maximise the benefit of franking in the superannuation fund. The object being to create for the client a well diversified Australian and International equities ‘portfolio’ with the maximum efficiency from a tax perspective.

Example 3 – The client is an association or charity that has a specific mandate that focuses on ethical investment and capital preservation, as the charity supports a number of scholarships. The Board of the Association meets quarterly. In consultation with the Board and its advisers, the PPM Portfolio manager will construct a growth portfolio of income generating investments that meets its Environmental, Social and Governance (ESG) requirements, the Portfolio Manager will meet with and present to the Board and its advisers.

These examples are for illustrative purposes only and each client individual circumstances will be taken into consideration in conjunction with the advice from the client and their investment advisers – however hopefully they clearly demonstrate the individually tailored nature of an IMA and the clear benefits to those clients.


The advantages of IMA and SMAs over other available investment structures are clear. Direct ownership, transparency, cost and tax effectiveness are the core benefits for our clients of PPMs IMA and SMA investment management solutions.

The following table details the key features of IMA, SMA and alterative investment structures

 

FeatureManaged FundsLICsEFTsSMAsIMAs
Tax EfficiencyPoorModerateGoodGoodExcellent
PortabilityNoneNoneNoneGoodExcellent
Managed to Particular Tax OutcomeNoSometimesNoNoYes
TransparencyPoor-ModerateModerateGoodExcellentExcellent
Direct OwnershipNoNoNoYesYes
Embedded Tax LiabilityOftenOftenSometimesNoNo
Capital Losses can be applied to:Future gains within structureFuture gains within structureFuture gains within structureAny current or future gainsAny current or future gains
Variety of Investment OptionsExcellentGoodModerateModerateModerate
Portfolio ConstructionManager's discretionManager's discretionManager's discretionModel portfolioManager's discretion
Tailored ManagementNoNoNoNoYes
Management Fee Tax DecuctibilityNoNoNoNoYes

 

Please contact our team for further information of PPMs service offering.

Sally Humphris
Business Development Manager
sh@ppmfunds.com
M: 0418 968 785
P: (02) 8256 3777

Adam Griffiths
Business Development Manager
ag@ppmfunds.com
M: 0423 648 682
P: (02) 8256 3777

 


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