A separately managed account (SMA) is a customised investment portfolio owned and managed by a single institutional client. The asset manager operates under a discretionary mandate, tailoring holdings and strategy to the client's specific objectives, constraints, and governance requirements while maintaining operational independence.
A separately managed account (SMA) is a customised investment portfolio owned and managed by a single institutional client. The asset manager operates under a discretionary mandate, tailoring holdings and strategy to the client's specific objectives, constraints, and governance requirements while maintaining operational independence. The institution holds all securities directly in its own name, receiving full transparency into positions, valuations, and execution.
Separately managed accounts have been a standard instrument for large institutional investors since the 1980s. They represent a distinct middle ground between direct in-house management and commingled fund structures, offering scale, professional expertise, and bespoke customisation. Today, they form a significant portion of capital deployed by pension funds, sovereign wealth funds, endowments, and insurance companies worldwide.
How does an SMA differ from a commingled fund?
The primary distinction lies in ownership and transparency. In a separately managed account, the institutional client owns all securities directly; the portfolio is segregated from other clients' capital. The asset manager executes trades, rebalances, and reports performance, but holds no assets on its own balance sheet. Commingled funds, by contrast, pool capital from multiple investors into a single vehicle, with each investor holding a proportional stake.
This structural difference creates cascading implications. An SMA allows the institution to implement voting policies directly—whether that means engaging with portfolio companies, excluding specific sectors, or following shareholder proposals aligned with its governance framework. A commingled fund investor delegates voting to the manager or participates only through majority-held resolutions.
SMA holders also benefit from granular tax management. A large pension fund can harvest losses in one position while maintaining exposure to a correlated asset in a different account structure. Commingled fund investors cannot capture such tax efficiency because their gains and losses are pooled.
Costs present a trade-off. SMAs typically carry higher basis point fees—often 15 to 50 basis points for equity mandates—because the asset manager incurs dedicated relationship management, customised reporting, and systems costs for a single client. Commingled funds, spreading these costs across hundreds of investors, often charge 5 to 20 basis points. However, for institutions with $10 billion or more in AUM, SMA fees compress sharply through negotiation, sometimes falling below commingled fund fees when factoring in all-in costs.
What does an SMA mandate typically include?
An SMA mandate begins with a written investment policy statement (IPS) that articulates the client's objectives, constraints, and governance rules. For a pension fund, this might specify a target allocation (60% equities, 35% fixed income, 5% alternatives), permitted securities (excluding fossil fuel producers or weapons manufacturers), benchmark indices, and acceptable tracking error.
The asset manager then discretionary authority to construct and rebalance the portfolio within those parameters. This discretion is the defining feature: the manager does not require approval for each trade, only documentation that actions comply with the IPS and applicable regulations.
Common SMA mandate types include:
Core equity mandates typically track or modestly outperform a broad market index (such as the MSCI World or Russell 1000) with tight tracking error budgets of 100–300 basis points. These form the backbone of most institutional equity allocations.
Fixed income mandates may target government bonds, investment-grade corporates, or emerging market debt, often with a specified duration and credit quality range. Many now incorporate ESG screens aligned with net-zero commitments.
Tactical mandates grant the manager discretion to overweight or underweight asset classes, sectors, or geographies within a defined band, allowing some market-timing flexibility while constraining drift from the strategic allocation.
Customised exclusion mandates enforce specific restrictions—divesting from companies involved in thermal coal mining, weapons production, or human rights violations. These have grown sharply as large asset owners adopt sustainability disclosure and IFRS S2 frameworks.
How do large institutions use SMAs in their capital structure?
Most large pension funds and sovereign wealth funds employ a layered approach. Core strategic allocations—often 70% to 80% of assets—are managed through a combination of low-cost commingled index funds and multi-asset-class SMAs with trusted managers. This provides liquidity, efficiency, and diversification.
Secondary allocations—equities and bonds with distinct mandates like emerging markets or long-duration fixed income—are often managed through SMAs to customise risk factors and ensure alignment with liability profiles. A defined-benefit pension fund with 20-year liabilities, for example, may hold a dedicated SMA of long-duration government bonds insulated from its core equity SMA.
Third, many large institutions maintain SMAs with specialist or concentrated strategies. A $200 billion sovereign wealth fund might allocate $2 billion to a concentrated Japanese equity SMA or a $3 billion mandate to a fixed-income manager specialising in green bonds. These bespoke vehicles allow precision without the fee drag of commingled funds where the strategy may be diluted across thousands of investors.
Proxy voting and governance are managed through SMAs. Large pension funds using proxy advisors to coordinate voting across multiple mandate managers rely on SMA structures to ensure votes are cast on the institution's behalf. Commingled fund managers typically vote independently, limiting client influence.
Direct ownership also supports engagement. When a pension fund's SMA manager holds 2% of a mid-cap company's equity, the fund can credibly engage with the company's board on governance, environmental risk, or labour practices. Commingled fund stakes often remain below engagement thresholds due to pooling.
What governance and reporting standards apply to SMAs?
Institutional SMAs operate under rigorous regulatory and professional standards. In the United States, ERISA (Employee Retirement Income Security Act) mandates fiduciary conduct for pension fund accounts. Asset managers must act solely in the interests of the plan, avoid conflicts of interest, and document compliance. UK pension funds follow the Pensions Act 2004 and FCA guidelines; Australian superannuation funds adhere to the Superannuation Industry (Supervision) Act.
Performance reporting follows the Global Investment Performance Standards (GIPS), established by CFA Institute. GIPS require standardised return calculations, risk metrics, and fee disclosures, enabling pension funds to benchmark manager performance consistently across mandates. Quarterly reporting is standard; many managers now provide daily reporting through client portals.
Compliance documentation is extensive. SMAs typically include annual certifications of compliance with the investment policy statement, regulatory attestations, and audit confirmations. This transparency is a key advantage over commingled funds, where clients see limited behind-the-scenes documentation.
ESG and climate disclosure have become mandatory in many SMA relationships. The EU's Sustainable Finance Disclosure Regulation (SFDR) requires asset managers to disclose the ESG profile of mandates, including carbon footprints and sustainable investment metrics. Emerging IFRS S2 standards are driving detailed climate scenario analysis in SMA reporting. Large asset owners increasingly demand that managers document alignment with net-zero commitments and provide annual climate transition plans.
What fees and costs should institutional investors expect?
SMA fee structures vary significantly by asset class, manager tier, and client size. According to data from Cerulli Associates (a research firm covering institutional asset management), the median equity SMA fee for a $100 million mandate ranges from 20 to 40 basis points at mid-tier managers, with top-tier managers (those with $500 billion+ AUM) charging 15 to 25 basis points for core mandates.
Fixed-income SMAs are typically cheaper: 10 to 25 basis points for government and investment-grade corporate bonds, rising to 25 to 35 basis points for emerging market or high-yield strategies.
Multi-asset class SMAs (combining equities, bonds, and alternatives) often charge a blended fee, sometimes structured as follows: equity tranche at 20 basis points, fixed income at 12 basis points, and alternatives at 50–100 basis points on the allocation to each.
Large institutions negotiate substantial discounts. A $20 billion pension fund with $2 billion to allocate across multiple managers may negotiate SMA fees 30–50% below listed rates, particularly for core mandates. The largest asset owners (those with AUM exceeding $100 billion) often achieve all-in costs—including custody, reporting, and execution—below 10 basis points for passive equities and 5 basis points for indexed bonds.
Transaction costs and custody fees are separate. Institutions typically pay custody fees (charged by bank custodians like State Street, Bank of New York Mellon, or local equivalents) of 1 to 3 basis points. Transaction costs vary with trading frequency and markets; an active equity manager might generate 10–30 basis points of trading costs annually, while a passive mandate might incur 5 basis points or less.
How do SMAs integrate with alternatives and fund finance?
While SMAs excel for liquid equities and bonds, alternatives present structural challenges. Direct ownership of a private equity or infrastructure fund stake is difficult to segregate and manage as an SMA; instead, large institutions typically allocate to commingled vehicles or co-investment arrangements.
Many asset managers offer hybrid structures: a liquid SMA for equities and fixed income, paired with separate commingled fund allocations for private equity, real estate, and hedge funds. This allows customisation in public markets while maintaining reasonable fees and governance in alternatives.
When institutions need leverage or liquidity support for illiquid portfolios, they employ fund finance arrangements—credit facilities secured by fund commitments. These sit outside the SMA structure but complement it, enabling institutions to maintain steady distributions and rebalancing without forced sales of illiquid positions.
What are the implications for long-term institutional allocators?
Separately managed accounts remain essential infrastructure for large asset owners. As institutional mandates become more complex—encompassing ESG screens, climate transition requirements, geopolitical risk management, and liability matching—the demand for customised SMAs has intensified rather than diminished.
However, fee pressure is real. The shift toward passive indexing and rising competition from large multi-asset managers have compressed SMA economics. Smaller and mid-sized asset managers have struggled to compete unless they offer highly specialised strategies or deep engagement services.
At the same time, reporting and governance standards have become more demanding. Institutions now expect their SMA managers to deliver climate scenario analysis, supply-chain due diligence, and governance assessments alongside traditional performance reporting. This has increased manager costs, partly offsetting fee compression.
For allocators, the SMA model remains preferable to commingled funds when mandates exceed $100 million and require meaningful customisation. Below that threshold, the fixed costs of relationship management and reporting outweigh the benefits of segregation. Institutions should evaluate the true all-in cost of an SMA—including custody, reporting, and implementation—before assuming it is cheaper than a low-cost commingled alternative.
Large asset owners are also experimenting with model-portfolio SMAs: the manager provides a rebalancing framework and recommendations, but the institution (or a fiduciary agent) executes trades and holds securities. This hybrid reduces manager fees while preserving customisation. It has gained traction among sophisticated pension funds with in-house investment capabilities.
Finally, the regulatory landscape continues to evolve. Evolving sustainability disclosure requirements and climate standards (including the SEC's emerging climate disclosure rules in the United States and mandatory IFRS S2 frameworks globally) will make SMAs even more valuable for asset owners requiring granular ESG and climate reporting. Asset managers unable to meet these standards at competitive fees risk losing SMA mandates to better-equipped competitors.