Macro Markets Episode 64: The SMA Advantage—Institutional Strategies for Individual Investors
Adam Bloch, Portfolio Manager on our Total Return team, joins Macro Markets to explore separately managed accounts (SMAs), a structure that offers many potential benefits to individual investors. Bloch also shares his views on growth, inflation, and relative value in the market.
This transcript is computer-generated and may contain inaccuracies.
Jay Diamond: Hi everybody and welcome to Macro Markets with Guggenheim Investments, where we invite leaders from our investment team to offer their analysis of the investment landscape and the economic outlook. I'm Jay Diamond, head of thought leadership for Guggenheim Investments, and I'll be hosting today. Now, Guggenheim Investments recently launched a suite of fixed-income strategies in separately managed account structures for the wealth management market. Separately managed accounts, or SMAs, are actively managed portfolios, customized to meet investors’ goals. Now, Guggenheim is bringing SMAs to individual investors and through them, access to strategies previously available only to institutions in separate account structures. It's pretty interesting. So here to provide a detailed look into the structure and strategy of our new SMAs is Adam Bloch. Adam is a managing director and portfolio manager on Guggenheim Investments’ total return team. Adam, welcome back and thanks for taking the time to chat with us today.
Adam Bloch: Thanks so much for having me, Jay. Glad to be here.
Jay Diamond: Well, Adam, I want to get to your update on the macroeconomic outlook and your thoughts on the markets, which have been very active recently. But before we get to that, let's do begin with an explainer, if you will, of SMA accounts for the wealth management market. Put it bluntly—what are they?
Adam Bloch: Sure. So, our SMAs for the wealth market are actively managed, individualized portfolios that are designed for investors with at least $250,000 to dedicate to a given portfolio. We're deploying these strategies in a very similar way to how we manage separate accounts for our institutional investors, as well as how we manage some of our mutual funds. In essence, we're making these strategies available to individual investors in separate account structures using the SMA technology we worked to build over the past few years.
Jay Diamond: Now we're going to get to the strategies themselves in a minute, Adam. But let's dive into the SMA technology, if you will. How is an SMA for an individual investor different than a separately managed account for an institutional investor? And how is an SMA for an individual investor different than a mutual fund?
Adam Bloch: Sure. So, a lot of overlapping parts of the Venn diagram here. But to start with versus the institutional SMAs, wealth management SMAs are very similar in three key ways. One: they allow for enhanced visibility into what an investor holds and how the manager, Guggenheim in this case, is trading those holdings. Two: they give the investor some degree of customization at large enough account sizes. And three, the potential for enhanced tax management of the underlying positions. Where they start to differ a little bit is institutional investors can hold unique assets like structured credit and bank loans directly, but due to various regulatory restrictions, individual investors typically cannot hold those directly and need to use what we call a completion fund to hold those more esoteric securities. We'll talk more about that later, I assume. As for the difference between an SMA for an individual investor and a mutual fund for an SMA, a client essentially directly owns the individually held securities in the account and indirectly owns the securities in the completion fund that we mentioned before, if the SMA uses one. A client who owns a mutual fund shares in a pooled structure of securities and has limited customization or no customization capabilities within the funds that they hold. So again, the SMA structure enables an individual investor to access our long-term strategies in their own account, which is an option that previously was only available to large institutions who would often invest millions, tens of millions, even billions at a time.
Jay Diamond: So how can an individual investor take advantage of an SMA?
Adam Bloch: The SMAs, as I mentioned earlier, are available starting at a minimum of $250,000 per client account, and right now they're generally available exclusively through certain third-party firms that offer SMA programs. Currently Morgan Stanley and Schwab, but with an expanded lineup coming over the course of the year for Guggenheim. Individual investors looking to access our SMA capabilities should obviously ask their financial advisor for more information on availability.
Jay Diamond: Okay, so you mentioned a completion fund before. Talk to us a little bit about what a completion fund is.
Adam Bloch: Sure. So, completion funds are no-fee mutual funds that are designed to complement the individual securities in SMA accounts. So they're registered, actively managed 40-act mutual funds. They look and feel like a normal mutual fund. They're non marketed. So you can only buy them if you have an SMA with Guggenheim and one of the aforementioned sponsors. The completion fund exists so SMA clients can hold more esoteric or less liquid securities: high yield bonds, structured credit, bank loans. And in particular, holding those assets in these funds, one, allows for investors to hold assets that for regulatory reasons, individuals typically can't hold directly, but two, also allows for lower transaction costs on these less on the run security types. We call our completion fund GAINS, which is short for Guggenheim Active Investment Series. And as I said, they're only available within our SMA strategy. So you can't access the GAINS funds, absent having an SMA.
Jay Diamond: So tell me more about the rationale for the completion fund.
Adam Bloch: So ultimately, the completion fund pools capital across our SMA accounts, providing the scale necessary to hold these harder to access securities. And a lot of the securities that are held in the completion funds are in sectors that have historically represented a very important opportunity set within both the core plus and limited duration strategies. So think of it as assets like structured credit, bank loans and high yield. In addition, the completion funds offer targeted exposure, allow us to adjust risk dialing it up or down more easily, and sometimes in a more tax efficient way for the end client, rather than causing higher turnover of the underlying securities they hold. And they also help to minimize trading costs and make it easier to implement tactical trades that we're already implementing for our institutional clients. So another way to think about it is a large institutional separate account can hold lots of securities across the fixed income spectrum. Not quite as easy to do for an individual investor, which will have smaller holdings based on presumably smaller account sizes. So, the completion fund in effect is the solution to that problem.
Jay Diamond: What are the benefits of making an investment in an SMA as opposed to something else?
Adam Bloch: For individual investors I think there's several potential benefits to SMAs. First, in the case of SMAs, they use completion funds, and we should note not all SMAs need to use them. Investors get exposure to these less accessible markets in a lower cost fashion through a completion fund. Two, ownership aspects. Holding the securities directly gives the investor the opportunity for certain portfolio customizations, again at large enough sizes, which can lead to more targeted exposure, flexibility to implement more tactical trades, certain overlays, whether it's value streams or otherwise, that investors may choose to enact. And then third, depending on the policies of the sponsor, they may bring additional transparency both in the portfolio and the fees charged. You know, again, investors in the case of SMAs, really knows the full soup to nuts of how their portfolio is being managed and what they're being charged for rather than that being a little less clear in a mutual fund format. And finally, in many instances, the SMA can offer a greater ability to gain cost efficiencies. So tax loss harvesting is kind of one of the most popular use cases for an SMA, again, being able to target the individual tax management needs of an individual client.
Jay Diamond: I think it's a great explainer for how SMAs work and the benefits of them. But let's talk a little bit more now about each of the strategies that we're offering in the SMAs for the wealth market.
Adam Bloch: Sure. So we started with three strategies: core plus, limited duration, and tax-exempt municipal bonds. We've offered the same or very similar strategies for many years in separate account and institutional structures. So, the oldest of those is our core plus strategy, which we launched in 2006. It’s really a long term total return fixed income strategy, where our goal is to achieve attractive risk adjusted returns relative to the broader bond market. We do that through a relative value approach, emphasizing both bottom-up credit selection rather than index weightings in portfolio construction, and also top-down themes that are incorporated as part of our house views process.
Jay Diamond: Can you give us a little more information about what the portfolio might look like?
Adam Bloch: Sure. So within the SMA, the core plus strategy currently has a target interest rate duration or interest rate sensitivity of about six years, which is relatively similar to its benchmark, the Bloomberg U.S Aggregate Index. That duration target can and will fluctuate based on Guggenheim market views around the path of interest rates. The core plus accounts in SMA format will target holding 30 to 50 individual securities plus the completion fund, which itself will have several hundred underlying individual positions. Relevant constraints for core plus: max allocation for below investment grade corporates of around 20 percent and 10 percent max to preferreds. In all cases these limits include look through to the completion fund as well as if that was being held, the underlying securities are being held directly by the client. And then we do implement a max, generally up 40 percent to the completion fund itself as a line item, because we understand that the desire is primarily for investors to hold individual securities and not just a look through mutual fund, despite the benefits of that completion fund we talked about. So with these target max allocations in mind, what investors are likely to see in a core plus portfolio is individual holdings of agency residential mortgage backed securities, individual investment grade corporates, to a lesser extent but definitely some, individual Treasury positions. And then the GAINS completion fund which will hold those securities like structured credit, whether ABS, RMBS, CLOs, and high yield corporates and bank loans as well. Rolling it all up together. So individual holdings plus the completion fund our core plus SMAs will generally target an average quality of single A or better. So very high quality way to access the fixed income markets in a very diversified fashion.
Jay Diamond: So is there anything else we need to know about the core plus strategy and how you execute it?
Adam Bloch: The SMAs will be managed consistent with our institutional strategies and a large part of our success in managing core plus for institutional clients has been active management. So sector rotation, active security selection. And that will absolutely be part of the wealth management SMA program as well. Sector allocations are based on our macro-economic views, relative value determinations, credit outlooks at a sector level, whereas the security selection is based on bottom-up credit work and security specific relative value frameworks. Again, consistent approach of how we manage for our institutional clients, how we implement that for mutual funds, and now how we implement that for wealth management individual SMAs. But because our portfolios aren't static, and of course they'll change with market conditions, which is absolutely what an investor should want out of an active manager, they're actually quite nimble in their ability to take advantage of market conditions, and that is part of where the completion funds do come in handy. So this results in a constantly reinvesting, rotating portfolio that really seeks to minimize risk and maximize opportunities across the fixed income market at any given time. Again, subject to any individual client constraints or guidelines that are part of the SMA program.
Jay Diamond: Great. So that was core plus. Now tell us a little bit about the limited duration strategy.
Adam Bloch: Sure. So I'll keep it brief because frankly the components of limited duration strategy are very similar to what we just discussed for core plus. Very similar high level sector breakdown and kind of feel of credit risk for limited duration as in core plus. So 30 to 50 individual securities, again agency mortgages, investment grade corporates, Treasurys and then a completion fund that will look substantially similar to the completion funds held in core plus. Primary difference is the strategy for a limited duration targets interest rate duration or interest rate sensitivity of about two years rather than six. So, the duration target is meant to keep a less interest rate sensitive, shorter maturity profile portfolio. And the benchmark for that strategy is the Bloomberg Agg 1 to 3 year index. So it's the shorter maturity subset of the benchmark that we use for core plus. This strategy is kind of somewhere between enhanced cash and core plus. We don't suggest investors use it as an enhanced cash strategy, but a lot of times it's used for more intermediate holding period investment purposes rather than core plus, which tends to be much longer-term money.
Jay Diamond: So now for the third strategy, which is available in this initial suite of SMA offerings, this is the Tax-Exempt municipal bond strategy. But this one's a little different from the other two. Correct?
Adam Bloch: Yes. This one's quite different in a couple fashions. One it's single sector by nature. So unlike core plus and limited duration where we have the flexibility to invest across the fixed income landscape with tax-exempt municipals, we're really focused on generating income that is exempt from federal and in some cases, state taxes, which of course is generally only available through municipal securities. And this one's interesting because it really fits so well for the retail space for individual SMAs because it is so customizable. So it's an actively managed strategy that seeks to outperform its benchmark, same as core plus, limited duration. The benchmark here is typically the intermediate muni bond index. But again, investors can select a different benchmark, whether targeting a different duration or maturity profile or state specific exposures. Jay you're in New York, so you might want a New York only portfolio. I'm in California, so I might want a California only portfolio. It's that degree of customization to make it relevant for a client that makes this such a natural tie in for our customized SMAs. We don't use a completion fund in this strategy. Munis are kind of already designed to be held by individual investors, so there's really no need for a completion fund. But ultimately, again, the big value proposition is the degree of customization possible within a strategy for a given client plan.
Jay Diamond: Thanks for all this background on the structure of SMAs, but now let's spend a few minutes on your views on market conditions and the investment landscape right now. So let's start with your economic outlook.
Adam Bloch: So our economic outlook calls for a solid but more moderate pace of growth this year as the labor force expands at a slower pace amid changes to immigration policy, fiscal stimulus wanes amid a reigning in of government spending, and shift in in priorities in the White House. Overall economic policy uncertainty remains very high. You know, certainly the first few weeks of the Trump administration are very much reinforcing of that view, whether it's tariffs or tighter immigration restrictions. Either of those are potential downside risks to growth. On the other hand, new tax cuts and a boost to business sentiment, which we're certainly seeing are potential upsides to growth. Obviously, a lot of built-up CapEx spending from the past several years that seemingly is a potential to come to fruition over the next couple of years. You know, on the inflation front, obviously natural tie ins with both the tariff and immigration topics, but we are continuing to see disinflation, though it's likely to be a bit of a bumpy path in what we've seen for the past 18 months or so. Fundamentals are pointing towards slower inflation over time. But again, we have this somewhat exogenous risk of new economic policies out of the White House that could stall or potentially even reverse some of that progress. That makes the job of the Fed very difficult and makes the job of people who follow the Fed also very difficult, I might add. But we do view one rate cut in 2025 as the most likely outcome. Some recent hotter than expected readings on inflation. Seeing the most recent CPI report and jobs market remaining incredibly strong might keep the Fed on hold for even longer, maybe even for the entire year. But at the same time, we still have a persistent risk of faster and more rate cuts if disinflation ends up being more rapid than expected, the growth outlook falters, tariff policy, immigration policy don't end up being as inflationary as it's currently expected. But most importantly, we're unlikely to see rate hikes anytime soon. So, you know, bringing that back to the portfolio and the strategy, that means with rate hikes off the table for the near term and us all arguing about whether it's a few rate cuts or zero rate cuts throughout the end of the year, either way, that means now is a good time to lock in what is a historically attractive level of yields in fixed income.
Jay Diamond: What are some of your investment schemes right now?
Adam Bloch: So major themes. High grade fixed income has historically performed very well in both easing and pause cycles. We’re somewhere between the two as we just mentioned. And of course, yields are still very elevated. So that's incredibly attractive to a variety of different investor types, both institutional and retail, foreign and domestic. So we're seeing flows remain really strong into fixed income amid these persistently higher yields. Primary markets continue to be oversubscribed. We also from a technical perspective, saw a lot of issuance would have occurred in 2025 that got pulled forward into 2024. Whether that was election fears, Fed policy fears, etc. And so that's meant relatively light issuance calendar to start the year and you combine that technical from a supply side with the excess demand given the high level of yields, and it's creating a pretty favorable situation or set up for fixed income right now. That, of course, has helped drive credit spreads to relatively tight levels. We're not quite at the all time tights, but we're not terribly far from them either. So the upside from further spread compression is probably relatively limited at this point, but again, somewhat similar to the rate discussion, a likelihood for spreads to move materially wider is quite low given those technical dynamics and fundamental backdrop of a very strong economy. We do kind of balance that in the strategies with keeping an ample amount of dry powder, because at some point we will have spread widening that lasts for more than just a couple hours. So how we kind of balance that out is right now, we're prioritizing high carry, shorter maturity investments primarily in structured credit, high degree of cash flow returning to the portfolio from those underlying investments, those investments are deleveraging over time. That helps to supplement portfolios’ dry powder and keeping that powder dry and then having some spending money for the future. If we do get excess volatility that pushes spreads wider, you know, that'll give us a lot of capacity to take up credit beta. We're pretty near neutral right now. So certainly a lot of room to expand the credit risk profile of the strategies if and when the time is right.
Jay Diamond: Now, what do you think about rates and the shape of the yield curve?
Adam Bloch: So we broadly expect rates to remain relatively rangebound, you know, again kind of backed by that view we talked about earlier, right, where rate cuts are likely to be slower than what the market was expecting this time last year, but at the same time, there's really not much to support rate hikes either. So big numbers, we'll call it a ten-year between four and five percent, but more realistically probably continuing to bounce between four and a quarter and four and three quarters. So again, not a terribly unique opportunity from a total return perspective, but from a total yield or carry perspective, you earn called the midpoint, right where we are today, 4.5 peercent on tens and you construct a portfolio similar to these that have 150 or so basis points of credit spread on top of that, and you're pretty, you know, easily getting to a very high 5 percent or even low 6 percent portfolio in high quality, diversified fixed income.
Jay Diamond: So, with this perspective in mind, anything else you want to say about your overall portfolio strategy?
Adam Bloch: January was, a pretty wild month in many ways, and if that proves to be representative of the year to come, we should probably continue to expect further volatility, particularly given the uncertainty around trade and fiscal matters, immigration, taxes, etc. But again, stepping back the larger themes, you know, a strong U.S. economy, favorable disinflation trends, strong credit fundamentals, that should continue to create opportunities and that's really what drives longer run returns. And you think about the kind of value of fixed income, you know, your starting yields today. And that starting yield typically has a very high correlation, typically a 90 percent correlation or higher of your either three or five-year forward returns in fixed income. So, we make this job a little more complicated than we need to at times and when we distill down and simplify it, the starting yield, if that's attractive enough, for your return needs, then that's probably a pretty good time to be investing in fixed income and then you add on top of that, a situation like today where yields historically elevated, and we can find fair value credit spreads in some of these more off the run parts of the fixed income market and that creates a pretty compelling investment opportunity right now.
Jay Diamond: That's excellent. Adam, thank you again for your time on a busy day, in a busy week, in a busy month. But before we wrap up, what are the final takeaways you have for our listeners?
Adam Bloch: So we just talked a little bit about it. What makes it a compelling opportunity to invest in fixed income now? And kind of back to the earlier discussion we're having on investment vehicles, you know, if investors do have the capacity we really think it's worth exploring an SMA vehicle, the access to the markets, the degree of customization, the unique approach that we have at Guggenheim, particularly in focusing on the less followed parts of the fixed income market, those are all very accessible to individual investors at a much smaller account size than has ever been contemplated before. So we're really excited to have this new product offering. It's off to a very strong start, and we hope that it scratches the itch for fixed income for many retail investors.
Jay Diamond: Again, Adam, thank you so much for your time. I hope you'll come again and visit with us soon.
Adam Bloch: Thanks so much for having me, Jay. Great to talk.
Jay Diamond: And thanks to all of you who have joined us for our podcast today. If you like what you are hearing, please rate of five stars. Now, if you have any questions for Adam or any of our other podcast guests, please send them to MacroMarkets@GuggenheimInvestments.com and we will do our best to answer them on the future episode for offline. I'm Jay Diamond and we look forward together again for the next episode of Macro Markets. In the meantime, for more of our thought leadership, visit GuggenheimInvestments.com/perspectives. So long.
Important Notices and Disclosures
Investing involves risks, including the possible loss of principal. SMA strategies discussed herein are available exclusively through third party financial professionals and are not offered directly to the public through Guggenheim Investments. SMA target characteristics and allocations are for illustrative purposes only. Individual account holdings and characteristics will vary depending on the size of the account, cash flows, and account restrictions.
Individual accounts within the same strategy may have portfolio characteristics and performance that differ from one another. This podcast is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or is investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities.
The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax, and/or legal professional regarding your specific situation. This podcast contains opinions of the author or speaker, but not necessarily those of Guggenheim Partners or its subsidiaries. The opinions contained herein are subject to change without notice
Forward looking statements, estimates, and certain information contained herein are based upon proprietary and nonproprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this material may be reproduced or referred to in any form without express written permission of Guggenheim Partners, LLC. There is neither representation nor warranty as to the current accuracy of, nor liability for decisions based on such information.
The strategies described herein may not be suitable for investors. All investments have inherent risks. There is no guarantee the manager will be able to implement investment strategies successfully or achieve investment objectives. The market value of fixed income securities will change in response to interest rate changes and market conditions, among other things. In general, bond prices rise when interest rates fall and vice versa. High yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Structured credit, including asset backed securities, mortgage-backed securities, and collateralized loan obligations, are complex investments and may not be suitable for all investors. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.
The strategies discussed herein may include the use of derivatives. Derivatives often involve a high degree of financial risk.
Municipal assets will be significantly affected by events that affect the municipal bond market, which could include unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from municipal bonds held by investors could be declared taxable because of changes in tax laws.
Diversification neither assures a profit nor eliminates the risk of experiencing investment losses. The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade U.S. dollar denominated, fixed rate, taxable bond market. Including Treasuries, government related and corporate securities, MBS, agency fixed rate and hybrid ARM par through ABS and CMBS agency and non-agency.
The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade U.S. dollar denominated, fixed rate, taxable bond market. Including Treasuries, government related and corporate securities, MBS, agency fixed rate and hybrid ARM par through ABS and CMBS agency and non-agency.
The Bloomberg U.S. Aggregate Bond 1-3 year Total Return Index measures the performance of publicly issued investment grade corporate U.S. Treasury and Agency securities with maturities of 1 to 3 years.
The Bloomberg Municipal Bond Index has a rules-based market value weighted index engineered for the long term Tax-Exempt bond market.
Guggenheim investments represents the investment management businesses of Guggenheim Partners, LLC, which includes Guggenheim Wealth Solutions, LLC and Guggenheim Partners Investment management, LLC. Guggenheim Wealth Solutions, LLC is the primary investment advisor to the Guggenheim Wealth Management SMAs, and Guggenheim Partners Investment Management, LLC serves as subadvisor. Please visit GuggenheimInvestments.com/separatelymanagedaccounts for more information.