The Pull of Managed Accounts: Protection in Downturns

It’s not usually the best quarters in the equity markets that demonstrate the potential value of managed accounts relative to target-date funds.

Art by Harry Campbell

Retirement plan advisers and investment managers agree that in periods of marked volatility, managed accounts serve investors better than target-date funds (TDFs) and target-risk funds because of their ability to navigate changing markets—as opposed to being tied to a set glide path.

“As managed accounts are actively managed, they can be more tactical and focus on specific areas of the market,” says Ken Van Leeuwen, managing director of the Van Leeuwen Company. “For example, if you look at two areas doing well right now, technology and cloud computing, investment managers can hone in further in those areas and get more granular. They can find that Amazon, Microsoft and IBM are good investments. REITs [real estate investment trusts] that are storage facilities for computers is another area of positive performance that can be pursued. TDFs are stuck in their glide path strategies and cannot be tactical.”

Darnel Bentz, senior vice president and senior wealth adviser with Kayne Anderson Rudnick Wealth Management, also believes that “managed accounts are better—assuming that they are selective and actively traded with 30 to 50 names and not ‘closet index funds’ with hundreds of stocks.”

As Bentz explains, managed accounts that invest very broadly and mirror index funds—i.e., “close index funds”—are likely not going to produce excess returns to justify their higher cost.

“Managed accounts can overweight and underweight sectors to outperform,” he says. “For instance, right now, if you are overweight health care and technology, you are going to do much better. There are sectors that will take years to recover, while some companies are even thriving in this environment.”

Kurt Wedewer, regional president at American Trust Retirement, says one problem with target-date funds is the fact that the set glide path can lead to selling low and buying high—or becoming conservative at the worst possible time.

“How a managed account will invest is based on many other factors, including outside assets and other retirement assets,” Wedewer says. “Managed account managers will also incorporate economic conditions into their assumptions. The fact that TDFs are solely focused on age can lead to financial decisions that can negatively impact performance.”

Yet another advantage of managed accounts is that they can provide tax loss harvesting, Bentz says.

Knowing that their managed account is being actively managed also assuages investors’ fears during periods of volatility, helping them to remain invested, Wedewer says. “The other significant advantage of managed accounts is how they tamp down human emotion during periods of pronounced volatility,” he says. “A managed account takes the emotion out of it because the investor knows they have someone managing their account. It is a comforting feeling for participants.”

Indeed, David Blanchett, head of retirement research at Morningstar, says he recently took a look at how managed account and TDF investors reacted to the volatility that was unleashed as the coronavirus took hold.

“I have been looking at who stayed the course,” Blanchett says. “Both TDF and managed account users have done very well. Less than 2% of investors in both made a trade, with managed account investors holding on a little bit better than TDF investors.”

Of course, for a managed account to serve investors well, they need to share information about their finances with the manager, Wedewer notes. In his experience, managed account investors do engage pretty well with their managers.

“They want their money manager to know as much as they can about their finances,” he says. “They tell them their age, their compensation, their outside assets and what they expect from Social Security. Customization is the operating piece that managed account providers hang their hat on.”

Empower Retirement believes that both target-date funds and managed accounts can serve investors well, at different periods of their lives. In 2017, Empower introduced a dual qualified default investment alternative (QDIA) called Dynamic Retirement Manager.

“We leverage a target-date suite for the younger population and automatically, with an age trigger, move them into a managed account structure as they get closer to retirement,” says Tina Wilson, chief product officer at Empower.

“We see both as complementary,” Wilson continues. “The reason for this is studies show that TDFs are good when you are young. As you reach the mid-career point, a more personalized approach that focuses on downside risk, risk preferences and outside assets is more valuable for people.”