Active personalisation is the new active investing

For the first time in history, passively managed funds control more money than their actively managed counterparts.(1) Driven by lower cost of ownership, convenience, and ever-growing evidence that active management struggles to outperform passive in the long run, it’s not surprise that all types of investors are increasingly allocating to index-based strategies. In the United States, less than one in five active large cap funds managed to outperform the S&P500 index over a five-year period to December 2023. The Australian equity market is not much better, with only one in four managers outperforming the ASX 200 over the same period.(2)

This trend is also linked to the growth in the market for Exchange Traded Funds (ETFs), whereby investors gain exposure to the performance of broad-based share market indices by buying units in a fund listed on a stock exchange.

In Australia alone, there are now 370 different ETFs listed with a combined market capitalisation of almost $200bn – growing at over 33% for the year to April 2024.(3) In the US, the ETF universe is far larger, with more than three thousand on exchange, managing over US8.8tn in assets.(4)

Whilst ETFs have been a useful tool for investors, they fall short for many investors demanding more flexibility and customisation. Direct Indexing enables an investor to gain exposure to the performance of a market index like the ASX 200 or S&P 500, via a portfolio of direct shares, without the need to buy into a managed fund or ETF. Direct indexing technology also allows for customisation that investors cannot achieve with an ETF or managed fund structure.

Once the domain of institutional investors and high net worth, innovations in portfolio optimisation technology and more affordable execution costs, mean that Direct Indexing is now within reach of the masses. In the USA, direct indexing investments now account for over $500bn and growing faster than the ETF market. Many sophisticated, venture-backed firms are now offering this service to investors, and Wall Street has caught on. Recent acquisitions from firms such as Morgan Stanley, J.P. Morgan and Black Rock ensure that the rapid growth of Direct Indexing will only further gain pace.(5)

So why all the excitement about Direct Indexing? Direct Indexing offers some significant advantages that can be very meaningful to investors when compared with an ETF or index fund. These come about because the portfolio of shares is owned directly by the investor, removing the shackles of an ETF or managed fund wrapper. This provides investors the ability to customise the portfolio to meet their personal preferences and circumstances, potentially optimise for tax, all whilst providing an index return.

Here in Australia the opportunities offered by direct indexing are only now starting to be embraced. Direct Indexing requires investment management expertise, complex algorithms, and powerful computing power that until recently was inaccessible. Fortunately, this has changed thanks to the innovative technology platform developed by Briefcase. Using cutting edge technology, Briefcase provides the easy-to-use portfolio constructions tools to design, implement, monitor, and rebalance personalised Direct Index portfolios. It’s a transparent and low-cost approach to investing but a powerful one, that combines the best of index investing and customisation to deliver truly personalised portfolios for every investor.

Over the coming weeks, we will unpack more to help understand how Direct Indexing really works, dig deeply into use cases, and consider the portfolio design strategies that can empower advisers to add value to a broad range of clients, each with their own unique set of constraints, preferences, and values.

Like to know more? Contact us at enquiries@briefcase.au

References:

1. J. Cox, “Passive investing rules Wall Street now, topping actively managed assets in stock, bond and other funds”, CNBC, January 2024, www.cnbc.com/2024/01/18/passive-investing-rules-wall-street-now-topping-actively-managed-assets-in-stock-bond-and-other-funds.html

2. “SPIVA Data – Results by Region,” S&P Indices by S&P Global, April 2024, www.spglobal.com/spdji/en/research-insights/spiva/

3. I. Israelstam, Betashares Australian ETF Review April 2024, May 2024, www.betashares.com.au/insights/etf-review-april-2024/

4. “ETFGI reports assets invested in ETFs industry in the United States reached a new record of US$8.87 trillion at the end of Q1 2024”, ETFGI LLP, April 2024 https://etfgi.com/news/press-releases/2024/04/etfgi-reports-assets-invested-etfs-industry-united-states-reached-new

5. “The Case for Direct Indexing,” Cerulli & Associates, December 2022.