The Separately Managed Account: You Own the Securities

A separately managed account is an arrangement in which the holder holds the securities directly, in their own name. Somebody else decides what those securities are. Nothing is pooled, so no other holder's money moves these holdings, the limits can be written for this holder alone, and the cost of running the account is charged to this account rather than spread.

The definition omits as much as it states, and the omissions are as telling. There is no strategy in it, no asset class, no view about markets and no promise about results. The definition is about a register: whose name appears against the securities. Defining an arrangement by its register is unusual in investing. Almost everything a reader already knows about running a portfolio survives unchanged when the arrangement changes, and a small number of very practical things do not. Those few things are why the arrangement is worth setting out on its own.

The worked case is the Anantara Multi-Asset Portfolio, an invented discretionary mandate of Rs 500 crore run by Faiz Ahmad Ansari for an invented charitable endowment whose investment committee is chaired by Rukmini Deshpande. The mandate is the running example in this family, and it is exactly this kind of arrangement. Its stated shape is equity 60.0 per cent at Rs 300 crore, fixed income 30.0 per cent at Rs 150 crore and cash 10.0 per cent at Rs 50 crore, and every figure here belongs to one stated twelve month period.

What does the holder actually hold?

The securities themselves. Not a claim on somebody else's holding of them, not a share of a shared pot, but the actual shares and the actual bonds, registered against the endowment's own name and sitting with a custodianThe institution that safekeeps securities and settles trades on the holder's behalf. The custodian records who the securities belong to and does not decide what is bought. that the endowment can identify by name and write to directly. Ownership of the securities is a fact about titleThe legal fact of belonging. Whoever has title to a security is the person the register names, whatever else anybody has been authorised to do with it. rather than a fact about strategy, and two arrangements running the identical design can differ entirely on this one point.

Here is the everyday version. Two households both eat rice from the same sack every week. In the first, the sack stands in their own kitchen and a cook comes in each morning with a key, decides what to make and uses what is needed. In the second, the household pays into a shared kitchen down the street and takes a plate at the end of the day. The food may be identical. The recipes may be identical. The cook may be the same person. But in one case the sack belongs to the household and in the other it belongs to the shared kitchen, and everything that follows about who can look inside, who can set the rules and what happens when somebody else stops paying comes from that single difference.

Why insist on the register rather than on the strategy? Because every other question a holder eventually asks is answered from it. Who can see the individual holdings. Whose limits the manager works inside. Where the charge lands. How far a stranger's change of mind can reach into this account. None of those is a matter of the manager being good or bad at the job, and none of them can be settled by reading the design.

What exactly is handed over, and what is not?

A discretionary mandateA written authority under which the manager takes the individual buy and sell decisions without going back to the holder for each one, inside limits the holder has set. hands over one thing: the decision about what to hold and when to trade it, taken inside limits the holder wrote first. Nothing else moves. The handover is a big one and a narrow one at the same time, and the narrowness is what people miss.

Three things stay with the holder and none of them is negotiable in passing. Title stays: the securities never stop belonging to the endowment for a single day. The limits stay: the manager works inside them and cannot widen them, and a change to them is a change the holder makes in writing. And the right to end the arrangement stays: the authority was given and it can be taken back. DelegationHanding somebody the authority to decide. The property stays with the holder, and the person deciding acts for the holder without becoming its owner. here is a delegation of judgement, never a delegation of property.

Notice what this does to blame. If the endowment writes an equity band of 50 to 70 per cent and the year goes badly because equities went badly, that is the endowment's decision showing up in the result, not the manager's. If the manager sits at 60.0 per cent when the band allowed 50, the difference between those two positions is the manager's. Separating the two is only possible because somebody wrote down which was which before the year started.

What changes because nothing is pooled?

PoolingPutting many holders' money into one combined holding. Each holder then has a share of the combination rather than any particular security inside it. is absent here, and four consequences follow from that absence. Each one is a structural fact rather than a benefit anybody arranged, and separation buys none of them for free: they arrive together with a cost structure set out below.

One. Nobody else's arrival or departure forces a trade in this account. Two. The limits can be written for this holder's own circumstances rather than for a stated purpose that everybody must share. Three. The tax position and the cost baseWhat a holding actually cost to buy, on the dates it was bought. Gains and losses are measured from it, so whose purchases it records matters. of every position belong to this holder and are measured from this holder's own purchases. Four. There is a real holding to inspect, so the account can be read holding by holding at any moment.

The first one is the hardest to believe, so take it slowly. Suppose a large investor somewhere else decides to take their money out of an arrangement the same manager runs. In this account, the answer is that nothing happens. Not a small trade, not a delayed trade, nothing. There is no shared holding from which the departure must be met, so the departure never reaches here. Whatever trading happens in the Anantara Multi-Asset Portfolio in that week happens because the mandate called for it.

The second consequence is the one Rukmini Deshpande's committee cares about most. The Anantara mandate carries four limits: equity between 50 and 70 per cent, no single holding above 5 per cent of the portfolio, no unlisted holdings, and a minimum credit standing on the fixed income sleeve stated as a policy rather than as a rating symbol. A constraint setThe written list of what a portfolio may and may not do. The list is agreed before any holding is chosen, and every later decision has to sit inside it. like this one describes one holder's circumstances, and an arrangement serving many holders at once has to write its limits for the stated aim they all share instead.

How does the cost of this arrangement reach this holder?

Directly, entirely, and with nobody to share it with. In a separate account the charge is struck against this account and nothing about it is spread across other holders, so the arithmetic that follows is not an average of anything: it is this endowment's bill. The terms below are this mandate's own commercial bargain, not a market rate, not an industry level and not anything a regulator sets.

The fee baseThe quantity a fee is charged on. A fee of the same percentage produces a completely different amount depending on whether it is struck on assets, on a gain, or on something above a stated level. matters as much as the rate, so take the two parts one at a time. The management fee is 1.25 per cent of assets, and 1.25 per cent of Rs 500 crore is Rs 6.25 crore. The performance fee is 15 per cent of the return above a 10 per cent hurdle. The stated year returned 14.2 per cent gross, so the part above the hurdle is 4.2 percentage points. On Rs 500 crore that is Rs 21 crore, and 15 per cent of Rs 21 crore is Rs 3.15 crore.

A management fee of Rs 6.25 crore plus a performance fee of Rs 3.15 crore is Rs 9.40 crore in total. On Rs 500 crore that is 1.88 per cent of assets. Now walk the year down. Gross 14.2 per cent less 1.88 per cent leaves a net 12.32 per cent, against a composite benchmark that returned 12.6 per cent over the same twelve months. So a gross excess of plus 1.6 percentage points becomes a net shortfall of minus 0.28 percentage points. The portfolio beat its benchmark and the holder did not.

Two numbers, one year, and both of them correct. Plus 1.6 points is the gross excess and minus 0.28 points is the net shortfall, and they differ only in whether the cost of delivery has been taken out. Neither of them is the excess return on its own. The word gross or the word net therefore belongs in the same sentence as the figure. Without it, the same portfolio can be described as beating its benchmark or missing it, and both descriptions can be defended.

Does a bigger account pay a smaller rate?

Not under these terms, and the arithmetic settles it in a line. Both components are proportional to something that scales with the account, so doubling the account doubles the amount and leaves the rate exactly where it was.

Work it through. On Rs 1,000 crore the management fee is Rs 12.50 crore. The return above the hurdle is still 4.2 percentage points. On Rs 1,000 crore that is Rs 42 crore, and 15 per cent of Rs 42 crore is Rs 6.30 crore. Add the two and the charge is Rs 18.80 crore, or 1.88 per cent of Rs 1,000 crore. Twice the account, twice the money, the identical rate, and this is a property of these particular terms rather than of separate accounts as a kind. A different arrangement might tier the rate downward, and which arrangements do is a matter of their own terms.

There is a second comparison here that a holder cares about more than the benchmark one, and it is worth putting in rupees. The gross excess of plus 1.6 percentage points is Rs 8.00 crore on Rs 500 crore. The charge is Rs 9.40 crore. Once the extra market exposure comes out of the excess, the alpha over the same twelve months was 1.11 percentage points. In rupees that is Rs 5.55 crore. The charge exceeded the gross excess by Rs 1.40 crore and exceeded the alpha by Rs 3.85 crore, and stating that comparison is as far as anybody honest can go. Whether this arrangement was worth having depends on what the alternative would have returned and what the alternative would have cost, and no alternative was ever run alongside it.

What can this holder see that a summary line does not show?

Everything, and that is not an exaggeration. Every holding, every trade, every date, every price and the cost base of each position. The account exists as a list of actual securities, so the list can simply be read. A holder who can see the holdings computes the concentration instead of accepting somebody's chosen way of expressing it. Visibility is what makes the base rule enforceable.

Watch what that means with the Anantara equity sleeve. The sleeve holds 28 names inside Rs 300 crore. The largest single holding is Rs 23 crore. Measured against the Rs 500 crore portfolio, that is 4.6 per cent, comfortably inside the 5 per cent limit. The limit is written against the portfolio. Measured against the Rs 300 crore equity sleeve, the identical holding is 7.7 per cent. Neither reading is wrong and they answer different questions. A one line summary carries one of them, usually whichever the writer had in mind, and a holder who can open the list can compute both.

A holder reading only a summary would have to take somebody's word for the top ten at Rs 155 crore. A holder reading the account adds the first two rows and gets there directly, and can then ask a more interesting question. What do these 28 names have in common? Reading past a summary to the holdings underneath is look-throughReading past a summary to the individual holdings underneath, so that exposure can be added up across them rather than accepted as a single reported figure.. In a separate account nothing stands in the way, so it costs nothing to do.

What does the holder still not control?

Three things, and the list is shorter than most new holders expect. The specific securities. The timing of each trade. And the outcome. Nobody controls that. The holder controls the boundaries and the manager controls every choice inside them. The mandate was written to create exactly that division.

Think of a household hiring a driver for a long journey. The household names the city, names the day and rules out driving after dark. The driver picks the roads. If the household starts calling out turns from the back seat, the arrangement has not been changed on paper and it has stopped working in practice, and afterwards nobody can say whether a late arrival came from the route or from the interruptions.

What does it cost when a holder starts choosing holdings?

How does anybody use this in a room, on a Tuesday?

An investment committee like Rukmini Deshpande's uses the separateness to answer four questions that a summary cannot answer, and it asks them in the same order every quarter. Is every holding still inside the limits, computed on the base the limit is written against. How much the 28 equity names hold in common. How much has been charged this period, and against what base. And is the number in front of the committee gross or net.

A lender or an analyst looking at the same account from outside asks a narrower version. If the securities are registered in the holder's name, then the holder's balance sheet carries those securities and not a claim on anything, and the concentration in them is the holder's concentration. A household running a much smaller version of this arrangement does the identical work with a pen: read the list, add the lines that share a driver, check what came off the top this year, and ask whether the number being quoted is before or after that.

Which questions here are not settled by the two parties?

Six of them, and every one falls outside what the mandate settles. Who may open such an arrangement. The minimum amount that applies. Who must be registered to run one. The disclosures required, and how often. The charges permitted, and on what basis. And the records that must be kept. Not one of those is fixed by the mandate between the endowment and the manager; each of the six is set in regulation.

What is a separately managed account not?

A separately managed account is not a strategy. Nothing about holding securities in the holder's own name says anything about what those securities should be, and the same design can be run either way. The arrangement is not a promise of better results, and the stated year makes that vivid: a gross excess of plus 1.6 percentage points became a net shortfall of minus 0.28 percentage points once the charge came off. Direct ownership is not control either, as the holder who started sending instructions found. And the charge lands here in full with nobody to share it, so the arrangement is not a cheaper way of doing anything by itself.

A separately managed account is, and is only, an arrangement in which the register carries the holder's name and the judgement belongs to somebody else. Every other consequence follows from that one sentence, worked out on one mandate over one stated twelve month period.