Investment Trends

More Asset Managers Explore Replicating Investment Strategies Using SMAs And CITs

Drivers include customization, lower fees, and tax optimization

A new report, U.S. Product Development 2022: The Intersection of Product Offerings and Investor Preferences, from Cerulli Associates examines the complex U.S. product landscape for institutional and retail client segments, with special focus on financial advisor product use, and helps readers understand how advisors are using active and passive, which investment vehicles they prefer, and how they allocate client assets across asset classes/strategies. Access the report here.

November 30, 2022, BOSTON—Separately managed accounts (SMAs) and collective investment trusts (CITs) have seen growth rates not far behind that of exchange-traded funds (ETFs) in recent years. Asset managers are trying to keep pace with the requests of legacy mutual fund clients that want similar or identical strategies in different wrappers. As such, more firms over the next year are planning to replicate existing strategies than are planning to build out new strategies in vehicles such as CITs, SMAs, and ETFs, according to The Cerulli Report.

Asset managers are increasingly prioritizing SMAs—60% view model-delivered separate accounts as a large opportunity and CITs (56%). At least 30% of firms plan to replicate strategies in an SMA or ETF with tweaks that will take advantage of the attributes specific to the vehicle type, thereby improving the investor experience, typically from a standpoint of alpha, tax optimization, and/or customization.

Replications & Conversions Using SMAs & CITs

According to asset managers, drivers for replication using SMAs are focused on the structural benefits of the vehicle (75%), and the opportunity that it presents to asset managers to fit into platform offerings (88%). “Overall, SMAs fit better into partner firms’ platforms, which call for added customization and personalization, capabilities available to tailor investment strategies to individuals and households,” says Matt Apkarian, associate director.

At least 83% of asset managers are choosing to replicate strategies using CITs due to requests from plan advisors, consultants, or plan sponsors, signaling that the proliferation of the structure is heavily demand-driven. 78% of managers cite fee negotiation and relationship pricing as secondary demand drivers. “Asset managers can do well to cement relationships with large retirement plans by offering lower fees, which will often be needed as the plan fiduciaries fight to keep retirement assets for their participants,” says Apkarian.

Overall, Cerulli expects replications and conversions to accelerate as asset managers look to expand their vehicle capabilities and offer strategies in a vehicle-agnostic manner that can meet the needs of investor clients with varying objectives. “Asset managers should be careful not to recklessly replicate strategies across as many vehicle types as possible in hopes of gaining adoption but should carefully consider how each strategy is being used as a building block for portfolio construction,” states Apkarian. “Successful managers will find that they can safeguard against a declining mutual fund business, and also ultimately lead investors to find more value in financial services and better long-term investment options through customization and tax optimization,” he concludes.




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