Invest like a pension

Derek Shevkenek - Oct 31, 2022

The world of institutional investing used to be the exclusive domain of pensions, foundations and endowments – completely inaccessible to “retail” investors. But options now exist that allow you to invest money along-side pensions, even if you don’t have anywhere close to a billion dollar pension-sized portfolio.



So how do pensions go about investing? They typically seek advice from an institutional investment consultant firm who, in short, recommends an appropriate investment strategy. The consultant firm also researches, recommends and monitors institutional investment management firms hired to make the day to day investment decisions.

These investment management firms typically require minimums of anywhere from $5 million on the low end, to $50 million or greater. As an example, I recently had lunch with representatives from a firm with a minimum investment of $80 million dollars.



However, thanks to “managed accounts” available through some financial firms, you can actually hire the same institutional investment management firms used by pensions – but at much lower minimums. From my above example, the minimum drops from $80 million to $100,000 if accessing them through a managed account.

There are two types of managed accounts, the Separately Managed Account (SMA) and the Unified Managed Account (UMA).

In the case of a SMA, separate accounts are setup for each institutional investment manager you wish to include in your portfolio. SMA programs are beginning to be replaced by UMA programs in some firms for their flexibility, since UMAs allow multiple institutional investment managers in a single account. This allows for the investment discipline of rebalancing easier than SMAs. It can also be more tax efficient to have multiple managers in a single taxable UMA.



Regular mutual funds are very practical for beginning to moderate sized portfolios from perhaps $500 to $500,000. Managed accounts start to become practical for $300,000 to $500,000 and up to multi-million dollar portfolios. I’ll expand on this since so many investors use mutual funds.

Mutual funds (and ETFs) allow investors to pool their funds together with thousands of other investors. This allows for valuable and convenient investment diversification that is otherwise impossible or impractical for smaller portfolios.

But mutual funds cannot be customized – everyone is invested in identical amalgamated fund units. Transparency is low since fees, fund investment holdings and activities are not reported on statements. Everyone pays the same fee regardless of amount invested, although in previous columns I’ve explained how f-class mutual funds can be used in portfolios greater than about $500,000 for better fee efficiency and possible tax deductibility. Some funds also offer lower fees subject to minimum investment levels.

Managed accounts take things a step further. They offer greater transparency since investment fees are reported, along with showing individual investment holdings and activities. Fees are tiered, meaning they decrease as portfolio size increases. Fees may also be tax deductible in taxable managed accounts. There’s also much more control over taxable events. You can customize managed accounts for social/ethical considerations by restricting certain industries or companies from being owned.

If you have a moderate to large portfolio, managed accounts open the door to the world of institutional investing. You can invest like a pension.

Opinions are those of Derek Shevkenek and may not reflect those of BMO Nesbitt Burns Inc. ("BMO NBI"). The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. BMO Nesbitt Burns Inc. is a wholly-owned subsidiary of Bank of Montreal. Member-Canadian Investor Protection Fund.