2008 Buyers Guide & Resource Directory
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Next-Generation SMAs In Search of Next-Generation Solutions
December 17, 2007
Regardless of the management style used, the overlay manager must do a significant amount of administrative work, necessitating frequent communications with underlying sleeve managers, who are responsible for creating macro-model portfolios to meet the risk and tax profile of the underlying investor as indicated by the financial adviser.
Active overlay managers rely on proprietary optimization software or third-party systems from providers such as CheckFree Investment Services and Wakefield, Mass.-based Vestmark Software, which focus on broker-dealer sponsors. The SunGard Advisor Technologies business of SunGard Data Systems, Smartleaf of Cambridge, Mass. and Upstream Technologies--purchased by CheckFree Corp. in May--are best known in the bank-administered overlay management area, where turnkey asset management program solutions (Tamps) are favored.
"Overlay management involves the standard operational process for maintaining a separately managed account--account opening and maintenance, reconciliation and performance generation--but overlay managers must do trade coordination among several managers, cash flows among investment styles within a single account, and performance verification at the sleeve level," said Cheryl Nash, SVP of CheckFree in Jersey City, N.J.
CheckFree acquired Boston-based Upstream to support its expansion into overlay portfolio management. It is incorporating Upstream's trading modules into its new EPL (Enhanced Portfolio Lifecycle) platform, which will replace the company's APL system.
Overlay managers use an array of sophisticated software tools to ensure that their investment results match the sleeve manager's. To reduce the potential for a discrepancy, or dispersion, the overlay manager must track all cash deposits, withdrawals and balances for each sleeve manager's account--and the underlying investor accounts--and rebalance the number of shares and cash.
An active overlay manager "is responsible for the account's overall asset allocation and must implement the securities-level changes, as directed by the money manager in each individual sleeve," said Rob Klapprodt, president of Vestmark, who spoke at the UMA conference. But in a passive model "the money manager is responsible for managing any dispersion within its sleeves which could occur to accommodate a client restriction or improve tax efficiency."
Layers Upon Layers
Adding to the complexity for overlay managers is that there can be more than one sleeve manager for each investment style and an array of investment strategies selected by end investors and their financial advisers. That's on top of the account activity taking place on any given day at a sponsor shop.
"There could be trading restrictions on a client's account and a multitude of accounts are being opened, closed and funded daily," said Vincent Lepore, product manager of SMAs and UMAs for HSBC Investments in New York, at the conference. "There could also be a discrepancy between whether a security should be bought or sold, depending on whether the overlay manager is looking for the highest possible return or reducing the tax impact."
HSBC, which uses a passive approach, is migrating its investment adviser clients from several overlay management firms onto a wealth management system hosted by Prudential Investments that the bank will run internally. Money managers will forward their trading models and communicate with HSBC through the portal.
PFPC Worldwide's AdvisorPort unit, which offers overlay management for bank and brokerage sponsors, uses a proprietary data hub as well as software from CheckFree for rebalancing. "We run a daily filter for dispersion and will rebalance the account based on whether it is a tax-managed or non-tax-managed account," said Jeremy Molish, director of trading for AdvisorPort. "The rebalancing does not take place randomly but depends on tax requirements, cash balances and trading thresholds. That means that we can deviate from the model of the sleeve manager."