“Off the Rack” versus “Savile Row” The Value of Custom Tailoring for Equity Investors

Equity asset managers within professional investment advisory firms will often manage both discretionary fee-based accounts as well as open-ended mutual funds - using comparable domestic equity investment disciplines. When retail and institutional investors choose between these products, their decision often hinges on performance and portfolio customization. After reconciling each product’s gross performance for calculation methodology, management and trading costs, and systematic risk measures, we find that concurrently-managed (where the same personnel manage a separately managed account and an open-ended mutual fund over the same time period using identical investment disciplines) small-cap separately managed accounts outperform small-cap actively-managed open-ended mutual funds between 1998 and 2003. We argue that this difference in performance is attributable to differences in asset growth as well as an advisory firm’s reluctance to accept smaller separately managed accounts.