Separately managed accounts and mutual funds are like distant cousins who occasionally attend the same functions. They are both managed by professional portfolio managers and may even contain some of the same investments. Beyond this, a few amicable similarities and some more glaring disparities set the stage for two distinct investing experiences.
Both managed accounts and mutual funds involves oversight by a manager. Unlike managed accounts, however, individuals who choose to invest in mutual funds do not actually own the underlying asset the fund is investing in.
Account Minimums and Holdings
Although minimums vary depending on your brokerage firm, separately managed account minimums start from a relatively high $100,000 for equities, upwards of $250,000 for fixed income and $500,000 for state-specific portfolios. Mutual funds, on the other hand, start as low as $100 or $250, depending on the mutual fund company, account registration and share class.
One feature that managed accounts and mutual funds share is the variability in the number and composition of holdings. Holdings vary depending on asset class, asset size and what type of investment strategy a particular manager subscribes to.
Exploring Security Ownership
When you buy a mutual fund, the fund, rather than you, owns the underlying securities. Because many other investors have their money in the fund, their behavior can affect you adversely. Therefore, if there is a rush to redeem or a high turnover of participants, you may be subject to undesirable tax distributions at the end of the year.
Putting your money into a managed account means that you personally own the securities in the account. You have discretion over buying or selling the securities in your account and do not have to fret about other people's redemption activity, only your own investment goals.
Assessing Customization Options
With mutual funds, you don't have much say in what sorts of investments are represented in your portfolio. Separately managed accounts, however, because you own them, can be tailored to your specifications. You can choose to restrict certain sectors or securities or build a portfolio around a specific theme, such as socially responsible investing.
On the other hand, to participate in specialized niches such as emerging markets, high-yield bonds and sector-oriented equities, mutual funds may be a better choice because managed accounts may not be available for those strategies. Certain operational aspects of such strategies make them difficult to be offered as managed accounts, contends Charles Schwab.
Understanding Tax Implications
Tax consequences are another area where managed money and mutual funds split. Because you give up control over what a manager does to investments in a mutual fund, and a mutual fund is required to distribute at least 90 percent of its realized capital gains to its shareholders each year, you could be saddled with tax gains you don't want.
Owners of managed accounts have more flexibility to buy and sell securities that produce specific favorable tax consequences, such as harvesting unrealized gains for future realization or offsetting capital gains with capital losses.
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