Separately Managed Accounts Stay Popular
They’re in demand when rates are low and also when they begin to inch up.
Since the implementation of money market fund reform in 2016, which included gates, fees and a variable net asset value regime, prime institutional money market funds have withered. They have made a comeback, but not to their glory days. Another reason they have shrunk is because a host of investment alternatives have entered the market over the last several years. One of those alternatives is separately managed accounts.
SMAs have long been viewed as a solution that can enhance yield, provide control, and add diversification and flexibility to a corporate liquidity portfolio – and also as a decent alternative to money market funds. In its basic form, an SMA is a portfolio of securities that can be managed to a set of unique investment guidelines tailored to meet an organization’s needs. So, with an SMA, the manager has the ability to customize the strategy by identifying the appropriate maturity profile, sector, currency, and credit risk that are aligned with an organization’s investment policy and liquidity needs.
According to Fitch Ratings, assets in SMAs are estimated at $400 billion and it cites Federated Investors data as one sign of their popularity. Federated reports 97% growth in money market separate accounts between 4Q 2015 and the second quarter of 2017. Fitch expects “continuing growth in SMAs as investors are likely to re-evaluate their cash needs and move money out of government funds to higher yielding products.” Read more here.
Meantime, companies need a bit more structure when it comes to asset allocation. According to NeuGroup Peer Research, companies don’t have a systematic framework for capital allocation models nor clear indicators of which hurdle rates to use when. Although at some companies the capital allocation model may reside only in the head of the CFO, NeuGroup found in pre-meeting surveys across a wide variety of groups that the old reliable capital asset pricing model, using a company’s own beta, is the most common method to calculate its weighted average cost of capital (WACC). About one in five use their WACC for all hurdle rates while half use WACC in combintion with other evaluation methods. Read more here.
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