Managers of separately managed account (SMA) model portfolios have continued to improve their processes, leading to a decline in tracking error and lower relative performance discrepancies between a manager's unit trust and its SMA product, according to Standard & Poor's Fund Services (S&P).

"Managers that we may have previously criticised have implemented improved processes," S&P analyst Rodney Lay said.

"Specifically, the timeliness in which investment decisions are communicated to the various SMA platforms has improved.

"Similarly, the internal measurement of performance by the investment manager and the reconciliation with the actual performance of their model portfolios on each platform, so as to identify and address relative performance drift, has also improved."

S&P has concluded a review of 12 model portfolios and downgraded one portfolio, while it upgrading one.

The research house upgraded the Dalton Nicol Reid Australian Equity High Conviction Portfolio to four stars and downgraded the MCPM Core Australian Equity SMA to three stars.

Lay said the sector was characterised by concentrated, low portfolio turnover portfolios with predominantly large to mid-market capitalisation stocks.

"Investors have a preference for stocks they know and understand (generally larger market capitalisation stocks) and low turnover as it conveys the perception to many investors that the investment manager has a greater degree of conviction in their stock picks," Lay said.