Join our investing community

Index based SMAs

Discussion in 'Investing Strategies' started by ashwright, 19th Jan, 2009.

  1. ashwright

    ashwright Well-Known Member

    Joined:
    30th Nov, 2007
    Posts:
    116
    Location:
    Brisbane, Qld
    Hi,

    I have been looking at Separately Managed Accounts (SMAs) over the last few months with interest. It looks like a good way to hold a share portfolio, which someone else looks after it for you. Also a big benefit is that you can easily make monthly contributions (which is harder which shares and ETFs, due to brokerage). You also don't have the problem of capital losses being trapped in a managed fund.

    With the advantages in mind, I have been looking for a SMA which allows investing Index style, like the ASX Top20. With maybe one or two other stocks added in (can always do this from another account though). It would be great if it also had a low MER, as their is no stock selection.

    I would also love not to use an advisor. I do not think you need an advisor to help you pursue index style strategies.

    Does anyone know if such a product may exist?

    Ashley
     
  2. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Hi Ashley,

    I think the brokerage would start getting expensive for an SMA if you were making contributions each month. An SMA is purely a reporting platform for shares, if you want an index your better off with a managed fund who won't charge you brokerage/entry fees for monthly contributions.

    The idea of an SMA is that someone else chooses which shares to buy (and when to sell) the shares for you. Indexing is a different investment idea (read A Random Walk Down Wall Street by Burton Malkiel) where you own the shares in line with the weighting of their market capitalisation rather than taking active choices in investment decisions.

    Paying 22 lots of brokerage each month is a turnoff unless your putting in significant amounts.

    You should check out some indexed managed funds as these may let you achieve your goals without too much expense.

    Cheers,

    Dan

    PS Before making an investment decision speak to your FPA registered Financial Planner.
     
  3. benbegg

    benbegg Active Member

    Joined:
    18th Mar, 2007
    Posts:
    32
    Location:
    Brisbane, QLD
    Check out the Bluechip20 Fund that is being offered by Westpac now. It was being offered by Merril Lynch but they have handed it over to Westpac. Tracks Top 20, low MER, very low brokerage. Does require a small level of gearing but not a lot (Min $250 a month).

     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    Buying an ETF or direct shares is only cheaper than a managed fund (especially if looking for regular investments) if the combined brokerage fees (and management fees for an ETF) are less than the entry fees and MER of the fund.

    Low cost index tracking managed funds can actually be a far cheaper method for investing regular small amounts of money given that the entry fees are fixed (typically 0.15%) and are far cheaper than the equivalent brokerage you'd pay on a small investment: eg $500 invested @ $20 per trade = effectively 4% entry fee ... very expensive (naturally the rate goes down the more you buy in each transaction).

    You need to do the sums on each to see which is more appropriate for you.

    One-off larger transactions into an ETF is probably the cheapest option, but not for small regular transactions.
     
  5. ashwright

    ashwright Well-Known Member

    Joined:
    30th Nov, 2007
    Posts:
    116
    Location:
    Brisbane, Qld
    Hi,

    I have seen the Blackrock Top20 SMA before, and it is the closest I have seen to what I want. The Westpac version looks quite good, except the advisor fee is quite high.

    0.3% Brokerage
    0.6%pa Management Fee
    0.825% Dealer Group Fee (which is payable if you do not use an advisor)
    OR 1.1%pa Max Advisor Fee. (which is negotiable if you use an advisor)

    The compares quite favourably to the Vanguard Aust Index fund.
    0.2% Entry Fee
    0.75%pa Management Fee

    It is a petty that there is not a version of the Blackrock SMA which does not have an advisor fee. Especially since I do not want to use an advisor. Don't know why they have to charge such a high fee (0.8%) for not use an advisor.

    Ashley
     
  6. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Hi Ashwright,

    Not sure where you got the 2% entry fee from for Vanguard, check out page 24 of the retail PDS http://www.vanguard.com.au/vnl/pds/retail_pds.pdf

    According to the PDS the fee is 0.75% per annum on the first $50,000 and gets cheaper on a sliding scale (downwards).

    If you read Burton Malkiel's A Random Walk Down Wallstreet, he discusses "no-load" funds, ie, no entry fee funds.

    Cheers,

    Dan
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    Actually he wrote 0.2% ... which is the buy side of the buy/sell spread (+0.2% / -0.1%) ... which is effectively the brokerage cost.
     
  8. benbegg

    benbegg Active Member

    Joined:
    18th Mar, 2007
    Posts:
    32
    Location:
    Brisbane, QLD
    Thats interesting Ashley as I have had money in this fund for some 15 months now, and when the Margin Loan was with EML I don't believe a Dealer Group Fee was charged. With Westpac taking over it seems that the extra 0.825% has been tacked on to pay for the distribution of the prospectus and also to manage the models. I sort of thought that was what the 0.6% Management Fee was for, but alas Westpac are a bank aren't they and they cannot help but add extra fees can they! With this extra cost being in place I will consider going elsewhere with my Money I think. The Vanguard Fund looks like my alternative as this is the fund I considered when I decided to go with BlueChip20 15 months ago. One thing about this fund too is that I have found they seem to have well over 2% and more like 6% of my funds in cash most of the time, which is not what the prospectus states but it seems this is what happens.
     
  9. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Sim,

    I'm reaching for my glasses :)
     
  10. ashwright

    ashwright Well-Known Member

    Joined:
    30th Nov, 2007
    Posts:
    116
    Location:
    Brisbane, Qld
    It did surprise me a bit. I read the PDS quite quickly, so I might have made a mistake. If that extra fee was not tacked on, it would be an excellent product.
    I would be happy even if it was about 0.2-0.3%.

    All the other people I have seen reselling BlackRock SMAs, seem to take on a fairly high advisor fee. It would be great if there was a lower cost model for people you do not want an advisor. Especially since the model manager is making the decisions, there is nothing to advise.
     
  11. ashwright

    ashwright Well-Known Member

    Joined:
    30th Nov, 2007
    Posts:
    116
    Location:
    Brisbane, Qld
    Just got an email from Investsmart. They are offering another BlackRock Top20 SMA, which seems better fee wise then the Westpac one. (Same product really)

    0.05% Brokerage (Expected)
    0.6%pa Management Fee
    0.4% Fee to Investsmart (Advisor Fee)

    Market Leaders
     
  12. ashwright

    ashwright Well-Known Member

    Joined:
    30th Nov, 2007
    Posts:
    116
    Location:
    Brisbane, Qld
  13. benbegg

    benbegg Active Member

    Joined:
    18th Mar, 2007
    Posts:
    32
    Location:
    Brisbane, QLD
    I am going to get clarification from Westpac next week. I read in their Margin Lending Application (which is through BT) that if my balance is under $20,000 then they charge interest as if the balance was $20,000 so that is something else to follow up as my balance up until now is well under this and will be for some time. As the product is still managed by BlackRock and it is really just the Margin Lender that has changed (From EML to BT), I cannot see why Westpac would suddenly impose fees on an account holder that did not have them before. Only time will tell I suppose. I got to know the guys at EML that ran the product and they now work for BT so I am thinking I will give them a call and see what is happening.