Managed Accounts vs. Mutual Funds: A Checklist For Socially Responsible Investors

From Carl M. Birkelbach,

Chairman and Chief Executive Officer,
Birkelbach Management Corp., Chicago

If customized investment advice is important to you, managed accounts may meet your investment needs over mutual funds. That’s the appraisal of Birkelbach Management Corp. (BMC), which offers both investment alternatives and uses separate accounts for its socially responsible investment strategies. Besides customization, BMC Managed Account Services offer both cost savings and control benefits as compared to mutual funds. Here’s Birkelbach’s comparison:

Customization

• Incorporating social criteria important to you: While there are mutual funds for socially responsible investing, an investor may not be able to find one that fully meets his or her criteria at the same time it meets performance expectations. That may be one reason managed accounts hold $1.99 trillion in socially screened portfolios in the U.S., vs. $151 billion held by socially responsible mutual funds.*

• Personalized attention: A mutual fund is trying to meet the objectives of a widely varied group, while the managed account is trying to take care of the objectives of a particular client. Managed account investors can talk to readily accessible analysts. This personal attention is especially vital to investors who need additional information to feel comfortable.

• Tailoring of portfolio for return vs. risk expectations: With a managed account, you can get counsel on whether your stock selection is too risky or if you're overconcentrated in a particular industry or in stocks as a share of your total portfolio.

Cost Savings

• Costs: Several recent studies compute mutual fund costs at between 2.6 and 9.9 percent of assets. (Lower for index funds.) At the high end (funds that charge a 4-5 percent load in addition to other expenses), a mutual fund would need a 10 percent return just to break even. It's little wonder then that approximately 80 percent of funds underperform their benchmarks.

Costs include advisory fees, other operating expenses, transaction costs, sales charges, taxes and opportunity costs – e.g., for delaying trade execution, moving the price up for large orders, and not keeping funds fully invested.

Managed accounts charge a fixed percentage – typically 0.6 to 2.5 percent – of assets managed, which typically covers consultation, portfolio management, risk management and quarterly reports. Additional costs may include clearing house commissions, which will vary based on your negotiated rate and trading volume (light for an investor with a buy and hold strategy). There may be additional fees for optional services.

Control Benefits

Besides comparing costs, make sure you understand what control you have over costs in mutual funds vs. managed accounts:

• Tax liability: Mutual fund investors pay taxes on their pro rated share of the fund's capital gains. This can be especially galling for buy and hold investors, whose taxes are increased because of more active traders. With a managed account, you pay taxes only on the capital gains you realize. Because you own your securities directly, you can work with your tax adviser to implement tax-planning strategies that mutual fund investors may not be able to duplicate.

• Delaying trade execution: Mutual fund prices are set at 4 p.m. Eastern time, regardless of how volatile individual stocks in the fund may have been during the day and how eager fund holders would have been to buy or sell. With managed accounts, you can buy and sell whenever you like at much closer to the exact price that triggered your action.

• Market impact: Large mutual fund bids for a stock tend to drive prices up before the fund's bid price is met. The much smaller share volume of an investor's trade of a stock in a managed account is unlikely to affect pricing.

• Turnover: Mutual fund annual turnover rates typically range between 100 and 240 percent, with attendant commissions, taxes and other costs. In a managed account, turnover ideally is no more than 20 percent.

•“Cash drag” expenses: Mutual funds must keep some funds lying idle to meet redemptions – a requirement not applicable to managed accounts.

• Full transparency and knowledge of your holdings: Mutual funds typically send out quarterly reports of holdings (which may give a stale, inaccurate picture of holdings by the time the investors get them.) Clients with managed accounts have daily access to their holdings.

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Carl M. Birkelbach is founder, chairman and chief executive officer of Birkelbach Management Corp., a Chicago-based money manager since 1974 and a registered investment advisor, and Birkelbach Investment Securities, Inc. (BIS). BIS is a securities broker-dealer since 1978 registered with the U.S. Securities and Exchange Commission and a member of the National Association of Securities Dealers Inc. (NASD). BIS provides safekeeping and execution services through its relationship with Pershing LLC, the world's leader in correspondent brokerage services.
He became known to the investment community as the “Lone Bull” by being one of the few stock market commentators who, in the sideways-moving market of the 1970’s and early 1980’s, foresaw the bull market of the rest of the 1980’s and 1990’s.

Mr. Birkelbach has applied his nearly 40 years of investment experience as author of "Stock Market Forecasting Through Charting” and editor of more than 500 BIS Investment Strategy Letters. He also has appeared frequently as a market commentator on television and radio news programs and as a quoted source in business/financial journals and periodicals.
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* Source: Social Investment Forum 2003 Report on Socially Responsible Investing Trends in the United States
*For more information please refer to our Disclosure Document

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