Your guide to building a growth portfolio in an SMA

Professional management and direct ownership in one package? There’s a reason why sophisticated investors and advisers alike are gravitating towards separately managed accounts (SMAs). SMAs can be particularly well-suited to growth-oriented portfolios and offer transparency and control.

In the first part of Livewire’s mini-series, I discussed the basics of how the SMA structure works. You can read more in this interview here. In the second part of the series, I’ll discuss what growth investing looks like in this structure and why investors use it for this purpose.

Why SMAs work for growth investors

Growth investing typically involves allocating capital to assets with strong potential for appreciation - such as equities, ETFs, managed funds, or alternative investments. SMAs allow investors to hold these assets directly, rather than through pooled vehicles like managed funds or ETFs. This direct ownership provides several advantages:

• Transparency: Investors can see exactly what they own, down to the individual security.

• Tax efficiency: Unlike pooled funds, SMAs don’t carry embedded capital gains, allowing for better tax management.

• Customisation: Portfolios can be tailored to specific goals, risk tolerances, or ethical preferences.

For high-net-worth individuals or those with longer investment horizons, these features make SMAs a powerful tool for compounding returns while maintaining control.

Who should consider this approach?

Growth-focused SMAs are best suited to investors who:

• Have a medium to long-term time horizon (5+ years).

• Are comfortable with market volatility in pursuit of higher returns.

• Prefer transparency and control over their investments.

• Have investable assets typically starting from $250,000 and above.

Costs vary depending on the provider and platform, but generally include:

• Management fees ranging from 0.5% to 1.5% p.a.

• Platform or custody fees, often between $100–$300 p.a.

• Trading costs, which are increasingly compressed or bundled into platform fees.

Building a growth-focused SMA portfolio

We recommend clients start with clear goal-setting and asset allocation and invest through a structured model.

Setting Targets and Allocations

For a growth investor, the target might be an annualised return of 10–12% over a five-year horizon. To achieve this, we typically allocate:

• 85% to growth assets such as Australian and global equities

• 15% to defensive assets or a cash buffer, depending on the client’s liquidity needs and risk profile

Selecting the right investments

We identify high-quality investments based on:

• Historical performance and volatility

• Manager tenure and investment style

• Sector and geographic diversification

We often blend direct equities with active and passive managed funds, ensuring both performance potential and tax efficiency.

It is well documented that it has been a challenging time for large-cap Australian equity managers, so you want a low-cost tracking error-aware manager, but with the benefit of direct ownership. We still want an active manager as we are worried about the concentration risk of the banks and miners in the Australian market.

Our direct equity sleeve has around 30 holdings, with the top weights being BHP (ASX: BHP), Westpac (ASX: WBC), Commonwealth Bank (ASX: CBA), ANZ (ASX: ANZ), and Macquarie Group (ASX: MQG). It is important to spread the risk by ensuring no one stock represents too significant an allocation, for example, our biggest weight, BHP, is only 1.74% of the portfolio.

We also like long-term compounders like Aristocrat (ASX: ALL), Goodman Group (ASX: GMG), QBE (ASX: QBE) and Brambles (ASX: BXB).

When it comes to global allocations, you can consider spreading the risk by using different styles of managers. For example, we access a systematic fund named Vinva, fan favourite ETF VanEck MSCI International Quality ETF (ASX: QUAL), Vanguard International Shares Index, Lifecycle Global Share and a value tilt with Lazard Global Equity Franchise and Talaria Global Equity.

We took this view to take a value bias due to valuation expansion, and seemingly a lot of stocks are priced for perfection. We think that active managers could add value in this space, although we note it is a contrarian view.

Defensively, we have added Pimco Diversified Fixed Interest to get exposure to active duration both domestically and abroad. And we have the Yarra Enhanced Income Fund, which is one of the best funds in its asset class, and a very trustworthy management team.

Rebalancing and strategy reviews

Typically, SMAs will offer rebalancing quarterly to maintain target allocations and manage risk. There should also be regular strategy reviews to assess performance against benchmarks and client objectives, adjusting the portfolio as needed. Generally, such reviews in model portfolios are annual, depending on your provider.

This growth-focused SMA strategy offers a disciplined yet flexible framework for investors seeking to build wealth over time. In the next article, I’ll explore how SMAs can be used to generate short-term income, including the role of franking credits and tax efficiency.

Look out for the next article in the mini-series, where I’ll discuss how to build an SMA to generate reliable income.