KEY TAKEAWAYS
- There are many benefits to investing with an SMA as either an alternative or complement to other short-term solutions such as money market funds.
- Unlike mutual funds and other forms of collective investments, the investments in an SMA belong to a single investor. As a result, the portfolio cannot be impacted by cash subscriptions or redemptions by other investors.
- Because an SMA contains individual securities, capital gains can be offset by instructing the manager to sell investments that will produce a capital loss.
- The expected level of risk for an investment strategy generally can be defined by the amount of variability of returns around the performance benchmark for a given investment horizon.
- Western Asset’s SMA investment strategies span the liquidity, maturity and risk spectrums from extremely conservative to those that combine a conservative base with the objective of generating returns incrementally higher than cash alone.
Western Asset has managed fixed-income portfolios since 1971 and has become one of the world’s leading fixed-income investment management firms. We’re proud to offer a wide range of investment solutions for institutional short-term investors including money market funds, short-term bond funds and separately managed accounts (SMAs).
What Is an SMA?
SMAs play an important role in providing short-term investors with choices regarding how they access professional investment management. SMAs are professionally managed portfolios of securities tailored to a short-term investor’s individual return objectives, risk tolerance and any other specific requirements such as tax efficiency or environmental, social and governance (ESG) goals.
Choosing the Right Investment Guidelines
The management of an SMA’s investment strategy is defined by a set of investment guidelines. These guidelines shape the overall return objective, risk tolerance and any other desired restriction. Examples of standard strategies that we offer can be found later in this document, but they can also be fully customized as follows:
- Return objective: This might be lower or higher than the return expected from other investment options such as money market funds. Although not guaranteed, the target can be linked to the markets or economy through a performance benchmark. Typical benchmarks include the return on 3-month Treasury bills, 1- to 3-year Treasury notes, 1- to 3-year corporate bonds, or even a weighted combination of two or more of these.
- Risk tolerance: Although also not guaranteed, the level of expected risk of the investment strategy can be defined by the amount of variability of returns around the performance benchmark for a given investment horizon. This includes measures such as tracking error and Value at Risk (VaR).
- Other restrictions: A variety of investment characteristics can also be stated in the guidelines such as the minimum credit rating, type of issuer, maximum maturity date, acceptable country of issuer or underlying type of debt. The guidelines can also help drive ESG objectives by excluding undesirable specific industries or companies, or by meeting minimum standards. If tax liability is a consideration, then describing approaches to realizing returns or limiting investments to tax-advantaged issuers might also be appropriate.
The set of investment guidelines is a fluid document which can be updated whenever the circumstances of the SMA owner change. By employing the expertise of a manager such as Western Asset, changes can always be modelled and discussed thoroughly before being implemented.
Although not suitable for all investors, there are many benefits to investing with an SMA as either an alternative or complement to other short-term solutions such as money market funds. These can be broadly categorized as shown in Exhibit 1.
Which Investment Strategy Is Right for You?
At the heart of an investment strategy for short-term investors—such as corporate treasurers investing excess balance sheet cash—lie the critical objectives of preserving capital, maintaining adequate liquidity and generating an attractive level of return. In times when rates are exceptionally low compared to longer-term averages, the cost of liquidity is expensive. Making an investment with an investment horizon that is too short for your needs represents leaving returns on the table at a time when even a small amount of yield is important. Similarly, when the corporate credit environment remains robust—i.e., when the negative rating changes for investment-grade companies remain low—increasing credit risk in an overall investment strategy may be prudent.
Whether you are a cash investor looking to segment out your cash along only short-term strategies or if you want to include a short-term strategy as part of your broader longer-term portfolio, we believe that Western Asset has the right solution to meet your needs. Our strategies span the liquidity, maturity and risk spectrums from extremely conservative (Liquidity and Enhanced Liquidity) to those that combine a conservative base with the objective of generating returns incrementally higher than cash alone (Short Duration Constrained, Short Duration and Intermediate). Maturities range from extremely short (0-3 months) out to intermediate strategies (1-5 years). Our most conservative strategies employ US Treasury and government securities, whereas those further out the risk spectrum may utilize a broader investment set.
Separately Managed Accounts for Institutional Investors at Western Asset
Given our role as a trusted fiduciary, at Western Asset we aim to provide ongoing expert guidance for each of the steps and considerations highlighted here. Our aim is to make the process as streamlined as possible while also seeking investment solutions and strategies that fit the ever-changing individual needs of our clients, regardless of their organizations’ size.
If you have any questions or require additional detail, please contact your Western Asset representative.