Which Should Be Your Top Pick, Separately Managed Accounts or ETFs?

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

This papers is dedicated to the comparison of separately managed accounts (SMA) or combined investment trusts investments (CIT) vs. exchange-traded funds (ETF) investments performance. Such a research can be quite interesting to any investor considering the choice between individualized (SMA/CIT) approach or pure passive pooled approach (ETF). The authors confirm the common understanding that SMA/CIT charge on average a higher fee for investment management than ETF. The most interesting part of the paper concerns the performance analysis and probable tax strategies management that are possible only for SMA/CIT but not for ETFs.

Overall, the methodology of this paper is sound. The authors use the survivor-free database from Morningstar and a three-factor Fama-French model to analyze the performance per investment style (for commonly-used Morningstar styles). Two most important outcomes of their analysis are the fact that while SMA/CIT do not consistently outperform ETFs on the after-fees basis (on the other hand, they do not underperform as well) they do outperform ETFs on the risk-adjusted basis; and also that the majority of SMA/CIT do not utilize tax-management strategies.

However, some aspects of this paper must be improved:

1. The authors did not disclose Model I and Model II used in section 5 to derive the determinants of SMA performance. Without understanding the models it is not possible to take into account the results presented there.

2. The authors present returns on a monthly basis, but expense ratios on an annual basis, which makes the direct comparison of the before-fees and after-fees performance difficult. Also, average monthly returns do not generally correlate with the realized annual return (i.e. if the arithmetic means are used we can't derive the true annual returns from them). So I would suggest switching to annual returns instead of monthly returns, and if there are not enough calendar years in the sample a 12 months floating windows can be used to obtain a large sample of quasi-annual returns.

3. Besides the pure style-based comparison across all the time horizon it would be beneficial to consider performance on different cycle stage (crisis, bull market, volatile market). If a consistent tail risk management in indeed present in SMA/CIT as the authors suggest that should be clearly visible across the cycle, because the tail risk sky-rocketed in 2008-2009.

I do recommend publishing this paper after addressing issues #1-#2 above, and, ideally, adding some analysis as per point #3 above.

Author Response

Thanks so much for your time and consideration about our submission. Please find attached.

Author Response File: Author Response.pdf

Reviewer 2 Report

Comments and Suggestions for Authors

The study uses an old data sample from 2015. The results may be not be in the interest of the readers anymore. All references are very old. I would like to suggest the authors to use latest data for the study to provide meaningful results to investors and practitioners. 

Comments on the Quality of English Language

The study uses an old data sample from 2015. The results may be not be in the interest of the readers anymore. All references are very old. I would like to suggest the authors to use latest data for the study to provide meaningful results to investors and practitioners. 

Author Response

Thanks so much for your time and consideration about our submission. Please find attached.

Author Response File: Author Response.pdf

Reviewer 3 Report

Comments and Suggestions for Authors

Review Report for Manuscript ID: jrfm-2917430

 Title: “Which Should Be Your Top Pick, Separately Managed Accounts 2 or ETFs?”

 I commend the authors for their dedicated work in crafting this article. However, I would like to express a series of concerns regarding its both theoretical and empirical contributions. These concerns are outlined as follows:

 Theoretical Foundation and Innovation:

The article's emphasis is on data descriptions and it lacks robust theoretical underpinnings, failing to contribute significantly to theoretical and practical aspects of the literature. The article lacks innovation from a theoretical perspective.

 Data Relevance and Currency:

The data, spanning from 2000 to 2015, exhibits an 8-year time gap (2015-2024), rendering it outdated. Updated data is essential to reflect changes in investment markets and investor behavior.

 Literature Review:

The literature references are outdated, with the most recent citation dating back to 2014. A comprehensive and updated review is necessary to support the results adequately.

 Investment Strategies Clarification:

The article should categorize investment strategies into active and passive, elucidating subclusters. This classification, encompassing offensive versus defensive, growth versus value, and active versus passive strategies, would aid readers in contextualizing SMAs and CITs.

 

Figure-Caption Discrepancy:

Discrepancies between figure captions and symbols within figures create confusion. A clear explanation of the relationships between symbols and captions in the text would enhance reader comprehension. For example, in Figure 1. the caption is “Number of SMAs and CITs since Inception”, while it is mentioned three types of “Open to Both”, “Open to retail only”, and “Open to institutional only

 Risk Measurement Clarity:

The article lacks clarity on the risk assessment measures used. Clarification is needed on whether semi-Beta (undesirable volatility) or Beta was utilized in the risk-adjusted alpha and Fama-French methods.

 

Ambiguous Pronoun:

The use of the ambiguous pronoun "This" in row 72 should be replaced with "CIT" to eliminate ambiguity and identify the alternative being referred to.

 Comparison with Existing Literature:

The results lack comparison with prior research in literature and what is cited in the literature section of this article. A comparative analysis would provide valuable context and insights.

 Statistical Analysis and Result Modification:

Without a clear presentation of statistical analysis at a given significance level, statements such as "significantly low" should be revised to reflect a more cautious interpretation of the results.

Inferential Statistical Methods and Conclusive Insights:

The title “Which Should Be Your Top Pick, Separately Managed Accounts 2 or ETFs?” implies a determination of superiority between SMAs and ETFs, yet the article lacks conclusive results. The use of inferential statistical methods, multiple criteria, and an exploration of potential reasons for the findings' neutrality could enhance the research's depth.

 Due to these concerns, I recommend rejecting the article for publication in the esteemed Journal of Risk and Financial Management.

 

 

Author Response

Thanks so much for your time and consideration about our submission. Please find attached.

Author Response File: Author Response.pdf

Round 2

Reviewer 2 Report

Comments and Suggestions for Authors

The author has made a tremendous improvement for this paper. 

Comments on the Quality of English Language

The paper should go for a thorough proof reading process.