SMAs may hold as much as $1.5 trillion of munis, according to some market participants, while others peg it closer to $1 trillion to $1.3 trillion.
Regardless of the total, this is up exponentially from the $100 billion reported more than 15 years ago.
The tremendous SMA growth can be attributed to "client demand for a customized and tax-efficient vehicle, especially as demand from the retail wealth channel has grown significantly," said Nisha Patel, managing director of SMA Portfolio Management at Parametric.
Currently, she said "both retail and institutional investors seek strategies that fit their individual risk and income needs in fixed income, while also being customized for them to provide tax efficiency."
"The rise in electronic trading has increased the ability for managers to efficiently respond to this increasing demand," she noted.
SMA growth has been "pretty staggering to see," said Matthew Schrager, managing director and co-head of TD Securities Automated Trading, noting the "interplay between SMA and electronic trading is a very symbiotic relationship."
SMAs are a "business" of thousands or tens of thousands of small accounts, each with a small portfolio of bonds, professionally managed by a "big" asset manager, he said.
By its nature, "you almost cannot operate that business without a huge amount of technology, at least not efficiently," Schrager said.
Before electronic trading "took off," the SMA business was not that prominent and had "super high" account minimums, he said.
Now that electronic trading has "proliferated," with up to 20% of the market being electronified, account minimums have decreased, said Marty Mannion, managing director and co-head of TD Securities Automated Trading.
Account minimums have fallen to $100,000 over the past five to 10 years, he said, making the product more accessible to a much broader range of investors.
And without the adoption of electronic trading, SMA growth may have "capped out," or at least continued to struggle, Schrager noted.
Listen to Matt Schrager and Marty Mannion of TD Securities Automated Trading talk about the
For example, there would not be lower account minimums, meaning many investors would be unable to invest in the asset class, as "not everybody has a million dollars to put into munis," he said.
SMA growth and electronic trading are a "little bit of a chicken and the egg" situation, according to Kevin McPartland, head of market strategy and technology research at Coalition Greenwich, with market participants differing on which one begets the other.
On the one hand, electronic trading has led to the "explosive growth" of SMAs, with more electronic trading platforms showing up around five years ago, especially in markets such as munis, Patel said.
"Algo-based firms in the secondary market have allowed managers like ourselves to increase our efficiency in executing trades," Patel said.
Parametric, for example, sees 60,000 to 80,000 offerings on the muni and taxable side daily, and then overlays the firm's technology to "execute quickly and efficiently," she said.
Through this growth in electronic trading, it is easier for SMA managers to maintain those accounts and trade them more cheaply due to easily accessed liquidity, McPartland said.
On the other hand, the growth of SMAs has also led to the increase in electronic trading, said Bill Buzaid, managing director and head of sales and relationship management at Tradeweb Direct.
Retail demand for fixed income has increased since the Fed raised rates in 2022, which is also driving more electronic trading, McPartland said.
More money managers need to trade positions in and out of SMA accounts quicker, he noted.
Anecdotally, many of Tradeweb's clients — unable to handle manual trades in an efficient manner due to inflows into separate account strategies with their smaller account sizes and smaller trades — have needed assistance, Buzaid said.
Due to their inability to keep up with flows, these clients were almost "forced" to use technology more than before, he noted.
"The trend was SMAs started to proliferate … and then firms were forced to adapt to technology," Buzaid said. "Once they did that, they said, 'This is great. We're delivering better outcomes [and performance] than we had historically because of a lot of this automation.'"
Regardless, wider electronification has a direct impact on continued SMA growth, leading to greater efficiencies and a "frictionless" environment for better client outcomes, he said.
AllianceBernstein, with its more than 25,000 SMA accounts, has seen "explosive" SMA growth due to the firm's ability to invest efficiently and quickly on behalf of its clients, said Susan Joyce, head of municipals trading and fixed-income market structure at the firm.
Electronification allows AllianceBernstein to invest faster, manage tax losses more "dynamically" and be active in the market as conditions change, something that has changed from five years ago when the firm had limited electronic capabilities, she said.
"We can pivot rapidly and clients like the opportunity to achieve that additional active performance and have something that meets their specific tax needs," Joyce said.
The SMA market has opportunities and growth as clients and SMA investors look for customized opportunities, and she said electronic trading is needed to meet those goals.
Meanwhile, "managers will need to continue leveraging their technology to respond to clients' increasing demands for these strategies," Patel said.
Clients, she noted, "want to allocate to managers that can take advantage of inefficiencies, quickly invest their portfolios and optimize the most amount of value."
At Parametric, the firm has "heavily invested into our technology to allow for increased customization and more efficient trading specifically with a focus on tax and will continue to do so," Patel said.
In Tradeweb's case, Buzaid said many of its clients have invested substantially in technology to help automate and make their trading portfolio management processes more efficient to deal with increased flow through third-party vendors and in-house technological improvements.
Overall, electronic trading is continuing to accelerate, and adoption is continuing to increase across on both the sell-side and the buy-side, Mannion said.
On the buy-side, the biggest adopters of electronification have been SMAs, along with direct retail and a combination of direct retail and wealth channels, he said.
SMAs, for example, were earlier adopters because "when you're trying to build these customized portfolios that have lots of line items, you have to trade more pieces that have to be allocated specifically to those accounts," which can be done more efficiently through technology, he said.
And on the dealer side, the ability to trade electronically has become "imperative" to anyone providing liquidity in odd lot space, Mannion said, noting around 90% of the tickets in munis are in the odd lot space.
"If you're market making or providing liquidity in smaller pieces, there are tens of thousands of RFQs each day, there's a massive amount of inventory that you're trying to reprice, so the only way to do that effectively is with automation," he said.
As long as the "macroeconomic situation" encourages investment in fixed-income assets, SMA growth is only limited by technology, McPartland said.
"If the managers can maintain those accounts more efficiently through technology with automated rebalancing and trading, then they will be more willing to open up accounts with smaller and smaller initial investments, and it'll grow from there," he said.
