2 minute read
Investment
ANALYSIS
Choosing your stakes
An index strategy that’s all about customisation is expected to grow faster than other investment vehicles over the next four years as investors’ desire for personalisation intensifies.
Cerulli Associates expects assets in so-called direct indexing to climb to $825bn by 2026 from roughly $462bn now, according to the research shop’s new paper sponsored by direct-indexing provider Parametric Portfolio Associates. That’s a five-year compound annual growth rate of 12.3 per cent, exceeding growth forecasts for exchange-traded funds (ETF), mutual funds and separately managed accounts.
Direct indexing essentially allows investors to cherry-pick which stocks to buy in a benchmark index instead of owning a fund that tracks a specific gauge like the S&P 500. In recent years, the strategy has boomed in popularity. It gives specialisation-minded advisers the ability to tailor portfolios at lower costs, which has become more important as asset management firms vie for clients’ dollars.
“Competition continues to intensify in the wealth management industry as investors exercise more control over their
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SO-CALLED DIRECT INDEXING TO CLIMB TO $825BN BY 2026 FROM ROUGHLY $462BN NOW
DIRECT INDEXING
$462bn $825bn
portfolios and providers are challenged to differentiate,” the paper said. “This has continued to amplify industry interest in direct indexing and, more broadly, mass customisation of client portfolios.”
Wall Street has been pouring billions of dollars into direct indexing. Franklin Resources Inc., better known as Franklin Templeton, bought O’Shaughnessy Asset Management in September 2021 for its custom-indexing business known as Canvas. In 2020, BlackRock Inc. purchased Aperio for $1bn, while Morgan Stanley paid more than $7bn for Eaton Vance and its custom portfolio business Parametric in 2020.
To be sure, total assets in direct indexing are still dwarfed by ETFs and other products. Though Cerulli sees mutual funds’ five-year compound annual growth rate shrinking 2 per cent, they would still command nearly $19tn in 2026. Meanwhile, money in ETFs is projected to climb 9.5 per cent to $11.3tn in that span, while separate accounts are seen rising 7.2 per cent to $2.5tn.
“Direct indexing, once hailed as an ‘ETF killer’ that would revolutionise investing, has yet to make much of a dent,” Bloomberg Intelligence senior ETF analyst Eric Balchunas wrote in an October [2022] report. “Direct indexing could find some niche uses, but we don’t think it will surpass 2-3 per cent market share given it’s more complex, active and expensive than ETFs.”
To that point, Cerulli sees “mass-affluent and high-net-worth clients” as the largest addressable market for custom indexing, despite shops such as Fidelity and Altruist offering services for accounts with balances less than $10,000.
Franklin Templeton’s custom-indexing platform Canvas, for instance, isn’t offered to retail investors, according to O’Shaughnessy Asset Management client portfolio specialist Jamie Catherwood. But Canvas has crossed $3.5bn in assets and 2,000 accounts since launching at the end of 2019, he said.
“Just from our experience, it’s growing very rapidly, and it’ll only continue to grow as technology and software evolves and price points become lower and fees fall,” Catherwood said on Bloomberg Television’s ETF IQ.
