In a Managed Account, each client beneficially owns the shares in their portfolio rather than owning a unit in a pooled trust. You select a model which determines how your portfolio is managed.
You avoid the problem of inherited capital gains afflicting unit trusts. When you buy into a unit trust (or ETF) you “inherit” the tax position already present in the trust. When an ETF has done well, there are large realised or unrealised gains in the portfolio. This can give rise to unfortunate consequences for new investors.
Let’s say you buy in during June. You pay the NAV plus any buy-sell spread. And in July let’s say the market tanks. You might be sitting there with a paper loss on 20% on your investment based on NAV. However in September you get your tax report from the ETF which says what a wonderful year they had and you had 20% realised capital gain! So you end up with a tax liability for the previous year even though you lost money!
You avoid the issue of non-availability of realised losses that can affect unit trusts. Should the unitised ETF create realised losses, these are unavailable to be utilised in your tax return. Commonly a unit trust that has experienced realised or unrealised losses will see a high level of redemptions. This may worsen the situation, and if the manager decides to terminate the unit trust, all the losses are lost. If not, the unit trust can offset these realised losses against future realised gains. Ideally therefore, you would like to invest in a unit trust (or ETF) that has had a devastating period of losses (whether realised or not),but is now expected to perform well, since that will provide the best tax backdrop.
Unlike a unit trust, with a managed account you can usually choose to transfer securities in and out without triggering capital gains.
Highly active specialist unit trusts are far more prone to these tax problems than the index style ETFs, which have a far lower level of turnover. However, with ETF interest growing rapidly, one should be aware of these inherent tax issues with every type of unitised trust and be on the lookout for when they might be a problem.
