Funding & Investing

The role of SMAs in a low interest rate environment

Published: Mar 2020

Given that the ‘lower for longer’ rate environment looks set to continue well into 2020, investors seeking optimisation should be taking a dynamic approach. If a bespoke investment policy is desired, how about separately managed accounts? We look at their capacity to deliver the right results for treasurers.

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With many more companies today holding significant cash balances, the quest for better yields in this ‘lower for longer’ interest rate environment has given the separately managed account (SMA) a new lease of life. Cerulli Associates research cited by Morgan Stanley showed that between 2010 and 2017, SMA uptake rocketed by 84%.

The key to the success of the SMA is that it takes a bespoke approach to cash investment (hence they are sometimes referred to as bespoke mandates). Unlike with mutual funds (such as money market funds), a SMA portfolio manager buys individual assets for its client’s investment guidelines unlike a pooled vehicle. The investor is thus not buying into a pool of assets, but buying – and owning – the individual assets. These assets may reflect the investor’s liquidity requirements, from the short to the long term, and, crucially, their unique investment guidelines.

SMAs are typically used by institutional investors (and some ultra-high net worth individuals), some of which may prefer direct ownership of the underlying assets rather than being in a pooled vehicle. “It affords them the ability to fine tune the risk and reward of their portfolio,” explains Tony Callcott, Head of Pan-European Liquidity Client Solutions, Aviva Investors.

To be effective as a portfolio, the right scalability of investment is needed. Assets under management for a client portfolio can start at around 200m currency equivalency, with no set ceiling. The bespoke nature of SMAs mean they can be more expensive to manage than pooled funds. Providers argue that the bespoke mandate and the broad segment of cash being invested (from short to long term), means increased scope for yield enhancement.

Ultimately though, says Dennis Gepp, Managing Director and CIO, Cash at Federated Investors (UK), “set-up costs will come down to the amount of hand-holding and personalisation required”. In any case, if the Cerulli Associates figures referred to earlier are accurate, it is seemingly worth the cost for an increasing number of investors.

By customising the portfolio according to individual financial goals, it enables the investor to better meet and manage their own guiding principles (such as risk appetite, need for liquidity or ESG drivers). In essence, says Gepp, SMAs are characterised by “flexibility, control and the transparency of owning selectable individual securities”.

KYC (know your…cash flows)

Treasurers with “significant but relatively well-known cash flows over an extended period” can leverage an SMA most effectively, says Gepp. For a corporate with a substantial purchase scheduled for a more or less predictable future date (an M&A for example) it can be fruitful. Rather than locking-in cash for an extended period and running the risk of not being able to redeem on time (or tolerating very low returns for the duration in the short-term space), he argues that SMAs can help companies maximise returns on their overall cash pot and allow them to unlock it close to the required date.

Aiming that cash at what the client considers is likely to be happening at a future date, and then maximising investment opportunities around that, is what Gepp calls the “focused flexibility” of SMA portfolio management.

This might be easier for some to do than it is for others. Investors with well-defined cash flows have easier and more accurate forecasting at their disposal; this enables their cash to be invested with a higher degree of certainty across a range of tenors. However, for many, such predictability is a challenge, notes Caroline Hedges, CFA, Global Head of Liquidity Portfolio Management, Aviva Investors.

Indeed, investors whose cash flows are largely dependent on price-volatile commodities, such as oil, understand only too well how market movements can affect their performance. “It’s important for all businesses that do not have predictable cash flows to map what proportion of their cash flow is volatile, so they can optimise their portfolio to get the best return,” says Hedges.

For Gepp, this deeper level of understanding enables the treasurer to be in control of their portfolio from the outset. “The aim is never to be in a position of forced sales, because it nearly always takes place at the wrong time,” he warns. “We do not want to be taking unnecessary capital risks for the client so, at all times, the investment manager has to balance likely movements of the client’s cash with the overall look of the portfolio and the desired results.”

Structuring a portfolio always starts with a consideration of the investor’s goals over the longer term (say, five years), taking into account their known and anticipated cash needs within that timeframe. This way, the investment manager should be able to build-in sufficient liquidity, whilst still optimising returns.

Since 2018 (2019 for existing funds) in Europe, this has translated into a regulatory requirement to maintain a daily minimum of 10% overnight liquidity, and a weekly minimum of 30% liquidity (the US has slightly different rules). With an SMA, these liquidity rules (and thus their impact) are not applicable as the investor and provider have pre-agreed the investment guidelines and liquidity requirements for the mandate.

Getting started

An SMA requires administrative work as part of the set-up. This may include the provision of a custody agent (a large treasury may already have one on board) and preparation of legal documentation, for example.

Callcott says Aviva Investors has been an established and diversified asset manager for a number of decades, and has a well-honed set of processes and experiences to deliver the expected outcomes from a bespoke mandate. Gepp similarly says Federated has comparable longevity and experience. Both say they are on hand for the duration to guide clients through the set-up (Callcott quoting a turnaround of “no more than eight weeks in total”, from initial approvals, via establishing guidelines, to taking it to market).

Set-up process

Natalie Cross, Senior Client Portfolio Manager, Invesco, explains the SMA set-up process and some of its key considerations.

Scale is a key factor and unless it’s sufficient to enable the cash to be invested with adequate liquidity and diversification it may prevent a mandate from progressing. Management fees can also be lower compared to a pooled vehicle, especially if the scale of the mandate is significant, although additional fees, including custodian fees, will need to be considered. The timescale for the mandate is typically set for a minimum two- to three-year time period, whereas a pooled vehicle is open-ended and therefore the investment period can be much shorter.

However, the path of a segregated mandate is often a lengthy process as it involves engaging with many parties. This includes legal, custody, trading and operations, IT and compliance, covering aspects such as client onboarding and anti-money laundering (AML) requirements, fund reporting, servicing and billing. The process, depending on the complexity of the investment mandate, can, from start to finish, easily take several months compared to a couple of weeks when investing in a pooled vehicle such as a money market fund.

Invesco SMA set-up process

For illustrative purposes only. Image courtesy of Invesco.

So where do you start?

The process begins with the establishment of the Investment Management Agreement (IMA) which defines the investment objectives and guidelines. Typically, the client will provide their initial draft of the IMA for the investment manager to review.

The portfolio managers, compliance and legal teams will all participate in the review, negotiating the terms with the investor until both parties agree. The investment parameters need to be thoughtfully structured to ensure they are flexible and adaptive enough to cope, not only with changing markets, but also allow for active investment decisions to generate consistent performance in line with the client’s desired outcomes.

If guidelines are too detailed, they can often be counter-productive and not only lead to unforeseen increases in risk, but a detrimental impact to performance and limitations to the effectiveness of active investment management.

An equally key step is the appointment of a custodian who primarily will be responsible for safeguarding the assets being held and arranging settlement of any transactions, including the collection of income and payment of expenses.

Once a segregated mandate is established and funded, client reporting forms a large part of the ongoing communications as well as periodic reviews. Unlike with a pooled fund, where reports tend to be standardised, the reporting on segregated mandates is generally more flexible both in terms of format and frequency. An investment manager would work with their clients to understand the reporting needs and requirements in terms of portfolio reviews.

Building a portfolio

When it comes to portfolio building, even within similar industries, investor requirements can differ. Mandates will be driven by the selection of assets defined by investor liquidity needs as much as by cash optimisation. As such, the wholly bespoke nature of SMAs means there is no typical portfolio for a specific investor.

Callcott notes, some will focus on a relatively vanilla product range, whereas others are more prepared to chase yield, perhaps pushing out the duration and maybe looking to some fixed income and derivative assets. The point is that SMAs have the flexibility and optionality, in terms of asset class and duration, to meet most treasury investment criteria.

As such, if a treasurer is going to create a bespoke mandate, they should be seizing the opportunity to run different cash ‘buckets’ within that portfolio, leveraging the ability to access a component of it on a daily basis, and keeping a larger proportion wrapped up in suitable longer-term investments.

Regardless of approach, the use of highly-rated (often AAA), low volatility instruments in SMAs ensures investors are not taking additional credit risk by going down the credit curve, says Hedges. “To get that additional return, we’re taking advantage of the term-premium obtainable from investing in highly-rated issuers.”

Environmental, social and governance drivers (ESG)

The capacity of treasurers to set their own investment parameters is a good draw for corporate cash. “Clients today are more aware of credit risk, and diversification and concentration risk,” notes Hedges. Putting together a detailed investment management agreement for an SMA allows them to exclude certain counterparties or issuers where they have exposures elsewhere in the business and they don’t want to increase their concentration with that issuer, or they are driven by certain ESG factors.

Of the latter, investors may believe that the ethical pathway attracts a pricing premium but, states Gepp, “taking ESG and sustainable finance into account does not equate with a reduction in yield”. Where Federated takes a proactive ESG stance with target investee companies, he says it is “influencing by engaging” with them.

Helping these companies improve their sustainable finance and ESG deliverables has a positive impact, he claims, noting that “in the equities space, we have found that companies engaging with ESG have increased in value because the market judges them to be better-run businesses”.

Aviva Investors has the capacity to integrate ESG into SMA options. Hedges adds that “product sophistication” is now strongly in evidence as part of an ESG-optimisation approach by investors.

Staying ahead

The level of cash forecasting within treasury is more refined than it was just few years ago. Whilst treasury is now well-positioned to manage the requirements of the SMA, these accounts do call for a hands-on approach, says Hedges. “But that one-to-one relationship and the building of a fund to the exact specifications that suit the investor, its risk appetite, and its return objectives, is very much a positive,” she comments. It’s also a two-way street.

The fund manager should be offering investors regular review meetings and reporting, above and beyond regular investment models. This may include monthly investment commentary and online portfolio updates, as well as face-to-face meetings, as required. As Callcott explains: “we need to develop that working relationship with the investor because with a bespoke mandate, we need to be rather more joined up in our approach.”

Due diligence

Few treasurers are in a position to be able to employ teams of credit analysts to manage their cash. By choosing SMAs, a treasurer should expect its provider to use its expertise and understanding of the markets to maintain portfolio performance. Thus, treasurers should choose managers they believe have good credit processes, sound underlying investment practices and, of course, sufficient demonstrable experience in this space.

Treasurers exploring SMAs for the first time may not know precisely what they want, nor what services may be available. Some may even have forged “unrealistic expectations”, notes Hedges. In every case, treasurers should be seeking an explanation from their prospective fund manager as to how their funds will be handled, in terms of investment strategies, portfolio composition and different risk and return profiles. Treasurers may also wish to explore any value-adding services offered, such as collaborative input from in-house credit and liquidity specialists.

Due diligence will help treasurers gain a more accurate idea as to where their comfort levels lie, and how the SMA can deliver the best outcome from their cash investments.

SMAs at-a-glance



Treasurers can select the parameters for their investments and specify a risk-reward profile that suits their requirements.

Potential to earn higher yield:

SMAs can enable the generation of improved yields when compared with MMFs or bank deposits.

Flexibility and control:

If investment circumstances change, the investment guidelines can be rapidly changed to reflect this and keep in line with the treasurer’s goals.


Assets within the fund are owned directly by the investor, giving full transparency of the assets within the portfolio.



SMAs may require detailed guidelines, documentation and legal agreements, along with the appointment of fund managers and custodians.


Treasurers may not have the time to be involved in their portfolio’s ongoing management.


Treasurers require a higher level of understanding of the risks and rewards associated with each type of security so that they can agree the investment guidelines for their portfolio.

Minimum investment:

A higher minimum investment is typically required compared to MMFs.


SMAs may attract higher fees than MMFs.

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