Customized SMAs: How to Make Responsible Investing Truly Personal

By Gwen Le Berre, Director, Responsible Investing, Parametric Portfolio

Learn how responsible investors use customized separately managed accounts (SMAs) to precisely align their investments with their values.

As investors increasingly put their money where their values are, the financial industry has responded by rolling out a number of responsible-investing strategies. However, due to the challenges in offering a commingled vehicle, the definition of responsible for these products is meant to appeal to as wide an audience as possible. Because of this one-size-fits-all approach, it’s rare for these products to perfectly reflect the views of any single investor, potentially forcing investors to invest contrary to some of their core beliefs.

Thankfully there’s a solution: customized separately managed accounts (SMAs), which allow responsible investors to construct portfolios that express their unique values without compromising on their investing mandates.

Why should responsible investors use customized SMAs?

Passive SMAs are similar to exchange-traded funds (ETFs) and mutual funds in that they provide broad, index-based market exposure. But the stocks or bonds held in these collective vehicles are fixed, putting investors at the mercy of a manager or index provider’s view of what makes a company good or bad from an ESG perspective. By contrast, SMAs allow investors to choose which securities to own, ensuring their holdings align as precisely as possible with their particular ESG preferences.

This structural difference means SMAs provide a level of flexibility not found in off-the-shelf passive solutions. SMAs give investors full control of their underlying securities, meaning they determine which companies to hold and at what weights. At the same time, risk controls are put in place to ensure the desired market exposure is largely maintained, despite any increased emphasis on good companies in the portfolio.

How to build a customized SMA incorporating ESG guidelines

With an SMA, investors can express their individual ESG views and gain the market exposure they’re seeking through portfolio construction, active ownership, or a combination of the two.

Portfolio construction allows investors to customize their passive exposure, enabling them to own good companies that reflect their ESG principles while excluding bad companies that conflict with those principles. This can be accomplished with screens that only include companies with the best ESG track records or characteristics as the investor defines them. Customization can also be achieved through a quantitative integration process, which overweights companies with higher ESG scores while underweighting those with lower scores.

Portfolio Construction in Action

With active ownership, investors choose to own shares of bad companies so they can advocate for change at the corporate level. Through proxy voting, direct engagement with the company, and shareholder resolutions, investors can use their ownership stake to urge a company to make ESG-related improvements.

Active Ownership in Action

At the same time, investors shouldn’t lose sight of their preferred market exposure. SMAs are built to remain as close as possible to the risk characteristics of an initially desired exposure, all while taking particular ESG views into consideration. This means the investor can build a custom SMA using any market exposure of their choice, not just the ones available in a ready-to-go fund. This allows investors to build portfolios that reflect not only their views on ESG but also their geographic, sector, or factor preferences. Such a plan offers the benefits of keeping similar risk characteristics to the investor’s target strategy while incorporating their principles into their investments.

The bottom line

SMAs provide for a range of customization and control, providing greater freedom to express socially responsible views. The structure of an SMA means an investor can take advantage of flexibility that isn’t possible in other passive solutions, like ETFs or mutual funds. By customizing a portfolio as precisely as possible, SMAs are opening the door for investors who couldn’t find what they were seeking from mass-market solutions.

Originally published by Parametric, 2/8/21

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.