SMA growth spurred by customization needs, electronification

The rapid growth of separately managed accounts in the muni market has been aided by an ongoing desire for customization and the slow, but meaningful, move toward electronification and automation, conference panelists said.

SMAs have seen explosive growth over the past several years, reaching an estimated $1.33 trillion in assets under management at the end of 2025, according to J.P. Morgan strategists.

Interest in greater customization plays a role in that growth, as investors increasingly want bonds tailored to the state they live in, income needs, credit quality and preferred duration, said Susan Joyce, head of municipals trading and fixed income market structure at AllianceBernstein (AB), at a panel Tuesday at the Fixed Income Leaders Summit conference in Boston.

"People want to feel like they have personalized ownership over their bonds; they want a very particular strategy, and so if you have the data, if you have the technology, you can build out a framework for them that is customized, and then engage with the market," she said.

Electronification also contributes to the rapid growth of SMAs by making it cheaper and easier for managers to execute the high volume of smaller, odd-lot trades needed to build and maintain customized, tax-efficient portfolios.

Twenty-two percent of munis are electronically traded, up from 3% in 2013, said Audrey Costabile, a senior analyst in the Risk and Financial Markets Regulation team at Coalition Greenwich, in a separate panel.

This figure could be even higher, as those numbers are not capturing the electronic trading that is happening direct, Jim Switzer, SVP and head of municipals at AllianceBernstein (AB), said at a Wednesday panel.

"There's no surprise that the increase in electronification has also coincided with the growth of SMA," said Brendan Miller, principal, fixed income trader and portfolio analyst at Brown Advisory, at the same panel as Joyce.

And although technology lowered entry minimums, raising accessibility, the client base for SMAs primarily consists of high-net-worth individuals.

They "want a little bit more flexibility in terms of the structure of their portfolios; they're very tax-sensitive, so SMAs are certainly a vehicle that resonates from a product scale," said Alex Sedgwick, municipals and fixed income commercial executive director at S&P Global (SPGI), at the panel with Switzer.

If that massive growth continues, it's possible SMAs will hold more municipal assets than actively managed mutual funds in the next few years, industry professionals believe.

Sixty-one percent of participants in a poll at the Wednesday panel thought this could happen by 2030.

Over the past five or so years, SMA growth has been "truly remarkable," and if that continues, SMAs could easily outpace active management, said Francis Romano, head of ICE Bonds Client and Third Party Integrations at ICE, at the panel with Switzer and Sedgwick.

Some of that growth can be attributed to automated trading solutions, he said.

Third-party vendors can help solve some of the issues in scaling SMAs, such as technology, data and manual workflow problems, Brown's Miller said.

Brown Advisory, for instance, has seen robust growth in the muni SMA space over the past few years, he said.

A few years ago, the firm had mostly been relying on internally built systems and software, but "we knew as we scaled our SMA business, it's not feasible," Miller said.

Therefore, Brown partnered with IMTC, he said.

"For us, it wasn't necessarily about the vendor itself as much as it is building [a] scalable operating model, one that allows for customization," Miller said.

Furthermore, unification is important, AllianceBernstein's (AB) Joyce said.

It "needs to be a partnership between training, between quant, human research, and being properly managed teams, and then having really good technology," she noted.