Separately Managed Accounts: The Pseudo-Mutual Fund

The separately managed account is a relatively new form of investment that rivals the mutual fund. This type of investment provides you with several unique advantages over investing in a traditional mutual fund. Here are the basics of the separately managed account and why you might want consider investing in one in the future.

Separately Managed Accounts

Separately managed accounts are an investment vehicle that are used to leverage the experience of a fund manager in much the same way as a mutual fund. However, the way that the assets are held is the main difference between the two. With a mutual fund, you give your money to the mutual fund, and then the fund manager buys securities for the fund. You own shares in the mutual fund, but you do not actually own the shares to make up the mutual fund. In order to understand this concept, imagine what would happen if you called your mutual fund provider and ask them to liquidate their holdings in a particular company. This would not happen because the fund manager makes all of the unique investment decisions.

By comparison, a separately managed account leaves you in charge of everything. You start an account and a fund manager makes the investment decisions for that account. The fund manager buys and sells shares on their account and when this happens all of the accounts that they manage buy and sell the same shares. Therefore, the investment strategy is similar to a mutual fund, but everything remains in your account. This means that you can make individual decisions if you want. If you wish to sell all of your holdings in a particular company at once, you can do so without any problems. This would not be possible with a mutual fund.

Lower Investment Minimums

In years past, managed accounts were only reserved for the ultra rich. You had to have at least $1 million in order to have your account managed by a professional money manager. The returns that were realized by these money managers could be substantial, but the barriers to entry made it impossible for the general public to get involved. However, with advancements in technology, this is no longer the case. Now the minimum investment amounts are much more reasonable and more people can engage them. Everything is done electronically over the Internet and requires very little work from the account manager.

Tax Advantages

Separately managed accounts can provide you with a few advantages as far as tax implications are concerned. For example, with a mutual fund the tax burden is shared by all that own shares in the mutual fund. Therefore, if you buy a share in a mutual fund at the end of the year, you are partly responsible for the tax burden on the gains for the entire year. With separately managed accounts, you only pay for the taxes on money that you are directly involved with trading.

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