 Matthew Nelson
Director, Market Intelligence
Despite challenging market conditions, assets in separately managed accounts (“SMA”) have maintained a very healthy level of growth, averaging nearly 20% per annum for the past several years. Industry observer FRC expects that assets in these customized portfolios will top $1 trillion in 2010 and will rise to $1.8 trillion by 2014. But this growth, while good for SMA managers’ revenue, is not without its challenges as running a SMA offering is a major operational undertaking.
One of the key operational challenges associated with SMAs is managing step-out trades, or trades done away from the program sponsor. A back-of-the-envelope calculation on data found in the recent FRC report titled “SMA Step-Out Trading Trends in 2010,” suggests that on average roughly 60% of trades are stepped-out today, versus roughly 20% just two years ago. Further, nearly two-thirds of fund managers trade-away half of their trades or more, up from only 13% in 2008.
According to the FRC report, co-sponsored by Citi, the Money Management Institute and Omgeo, SMA managers are trading-away primarily to satisfy their best-execution requirements, which mandate that the manager trade with whichever counterparty offers them the best price, quality, speed and reliability of execution, , regardless of any business arrangements or obligations. But this is not the only reason that trades are done away. The adoption of advanced trading techniques by SMA managers who are concerned with not just best execution, but also liquidity, trade impact and cost is also fueling the increase in trade-aways.
Trade-aways, though necessary to meet regulatory requirements and provide optimal client service can be, in and of themselves a significant operational headache for SMA managers. Communication of trade-away information is largely manual with the majority of firms using email, phone and fax to transmit orders and block/allocation detail. As a result, it should come as no surprise that data entry is a major problem in this operational flow. Re-keying data from a fax or email into a post-trade system is a recipe for failed trades!
With over 80% of SMA managers anticipating more or the same amount of trade-aways in the future, this is not a problem that will go away or fix itself anytime soon. Instead, SMA managers need to investigate the tools and technologies available in the market today that can assist them convert from phone, fax and email to true levels of automation. As FRC states in the report, “Automation will clearly benefit the industry by reducing risks and costs…” Now that’s something that the industry should stand behind!
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