What it means
When you invest in a standard mutual fund or exchange-traded fund, you buy a tiny slice of a giant pooled pot. You have no control over the individual stocks inside that pot, and you might inherit capital gains tax liabilities created by other investors selling their shares.
A Separately Managed Account flips this model. You hold direct ownership of the underlying securities, such as individual shares and bonds, while a professional portfolio manager handles the buying and selling on your behalf according to your specific goals.
This direct ownership provides a massive practical advantage: tax customisation. Because you own the securities directly, your portfolio manager can strategically sell losing investments to offset your taxable gains, a process known as tax-loss harvesting.
This level of tax tailoring is nearly impossible to achieve inside a pooled mutual fund. Furthermore, these accounts allow you to set strict personal boundaries.
If your company has strong views on sustainability, or if your balance sheet already holds a large amount of stock in a specific sector, your manager can easily exclude those specific companies from your portfolio. You get the benefit of expert institutional management without losing control over your direct asset ownership.
While these accounts traditionally required millions to open, modern financial technology has lowered entry barriers, making them increasingly accessible to growing businesses and high-net-worth individuals. They represent the sweet spot between running your own portfolio and handing your money over to a blind pool.
Think of a mutual fund like eating at a giant all-you-can-eat buffet where everyone shares the same huge pot of stew. A separately managed account is like hiring a personal chef to cook a bespoke meal just for you in your own kitchen, using ingredients you specifically chose.
In practice
Real-world examples
Example 1
An entrepreneur with $50,000 of surplus cash sets up a separately managed account instead of buying a generic fund. She tells the manager to exclude fossil fuel companies to match her personal values. A pooled fund would not allow her to make that choice.
Example 2
A mid-sized consultancy with $250,000 in reserves uses a separately managed account to tailor its bond portfolio around upcoming tax payments and cash flow milestones. The manager buys bonds that mature just before each payment is due. This removes the need to sell anything in a falling market.
Example 3
A retail business owner with inherited shares uses a separately managed account to blend those holdings into a new growth strategy without triggering an immediate tax bill. The manager builds the rest of the portfolio around the shares she already owns. She keeps control over when the inherited shares are eventually sold.
Think of it
Think of a mutual fund like eating at a giant all-you-can-eat buffet where everyone shares the same huge pot of stew. A separately managed account is like hiring a personal chef to cook a bespoke meal just for you in your own kitchen, using ingredients you specifically chose.
Formula
Calculation
Net Investment Return = Gross Portfolio Return - Management Fees - Transaction Costs. Tax Saved from Harvesting = Harvested Losses x Tax Rate.
Worked example: your separately managed account generates a gross return of 8% on a $100,000 portfolio, which is $8,000. The manager charges a 1% annual fee, or $1,000, with negligible trading costs, so net growth is $8,000 - $1,000 = $7,000, a net return of 7%.
Now add tax-loss harvesting. Suppose you realised $60,000 of gains earlier in the year, and the manager sells losing holdings to realise $25,000 of losses. Your taxable gain falls to $60,000 - $25,000 = $35,000, and at a 25% tax rate you save $25,000 x 0.25 = $6,250 in tax.Case study
Seen in the real world
This is a fictional, illustrative scenario. Brightwave Logistics, a mid-sized transport firm with $500,000 in surplus reserves, wanted a better return than a standard corporate bank account could offer. The finance director decided against a mutual fund because the company needed strict control over liquidity and wanted to avoid unnecessary tax complications. The firm hired an investment manager to set up a separately managed account focused on short-term corporate bonds and high-quality dividend-paying shares. Over the first year, the account earned a gross return of 6%, which is $30,000 on $500,000.
After a 1% management fee of $5,000, the net gain was $25,000, or 5%. More importantly, when a sudden market drop created unrealised losses in part of the equity holdings, the manager harvested $25,000 of losses to offset gains realised earlier in the year. At a 25% corporate tax rate this tax-aware move saved Brightwave $6,250. By keeping direct ownership of the securities, the finance team kept full visibility over the balance sheet while enjoying professional management. Reports arrived each quarter, listing every holding by name.
Watch out
Common mistakes
- Assuming separately managed accounts are only for multi-millionaires, ignoring modern platforms that lower minimum investment requirements.
- Ignoring the fee structure, as individual management fees can sometimes be higher than those of low-cost index funds.
- Expecting guaranteed market outperformance just because a professional manager is running the portfolio.
Questions
People also ask
Who actually owns the shares in a separately managed account?
You do. Unlike a mutual fund where you own units in a collective pool, you hold the direct legal title to every individual stock or bond in the account.
Are these accounts more tax-efficient than mutual funds?
Yes, generally. Because you own the securities directly, your manager can time the sale of individual assets to manage your personal tax liabilities more effectively.
What is the typical minimum investment required?
Historically the minimum was $250,000 or more, but newer financial technology platforms now allow investors to open these accounts with significantly smaller sums.