Highly personalised portfolios delivered with efficiency. Direct Indexing makes it possible.
Whether it’s ordering a new vehicle in the exact colour and specifications you are seeking or creating your latest music playlist, today we live in an age when consumers can have things just as they would like them. But when it comes to the highly regulated and standardised world of investing, this trend has taken longer to catch on.
In the past, investors have been forced to choose between off-the-shelf investment options usually delivered via a managed fund (listed or unlisted) or bespoke portfolios, generally at a greater cost due to the time and skill required to run such an investment strategy. And, while the rapid growth in passive investing and Exchange Traded Funds (ETFs) have made investing more accessible, they have not solved the personalisation challenge.
Enter Direct Indexing as the solution that allows investors to benefit from low-cost passive investing, while catering for the personal preferences that are unique to every individual. Importantly, by combining highly sophisticated investment capabilities with modern computing power, personalised portfolios can now be delivered in a highly efficient way. This allows advice providers to manage many unique portfolios for their clients, at a price point similar to traditional index tracking structures.
How does Direct Indexing work?
The term ‘Direct Indexing’ describes a bespoke investment strategy where an investor holds individual securities (commonly, shares) with the goal of tracking the performance of a widely recognised 3rd party benchmark. This differs from more traditional methods of index investing, where an investor owns units in a managed fund or ETF.
By owning the shares directly, investors can access a range of benefits which, until recently, were only accessible to large, institutional investors. These include greater transparency and control, the flexibility to customise the portfolio to meet individual requirements and the potential for improved after tax outcomes.
Importantly, Direct Indexing allows every client to have a unique portfolio designed just for them – one that considers the values, preferences and individual constraints that each client brings. Some examples include clients that may:
Have strong ESG requirements. This could include not wanting to be invested in companies involved in the mining industry or companies involved in the production of fossil fuels.
Hold existing investments concentrated in one or more companies that they don’t wish to sell, but would benefit from diversifying around.
Be unable to buy or sell specific shares due to their professional position such as a director, board member, auditor or investment banker.
Be involved in philanthropic activities that are inconsistent with the business models of certain companies, such as distributing tobacco or weapons production.
There are many more examples as to why a direct indexing approach makes sense. The common thread throughout is that Direct Indexing allows for these investing challenges to be solved for, whilst still enabling the client to benefit from a benchmark aware approach.
How can a portfolio be personalised but also efficient to manage?
While it is possible to build a bespoke share portfolio for clients to accommodate their unique needs, this approach is typically more expensive due to the added time and expertise required to build, implement and daily manage every portfolio. It can also lack precision in that it is difficult to benchmark a portfolio to a target when a range of restrictions have been incorporated, potentially resulting in a wide array of performance outcomes.
Direct Indexing solves for these challenges by accommodating for the client’s personalisation requirements whilst still targeting returns consistent with the chosen index. Despite exclusions being made to the investible universe, Direct Indexing employs sophisticated quantitative portfolio management techniques, deep investment management expertise, as well as sophisticated algorithms to design and manage each and every portfolio with precision. With modern computing power doing much of the heavy lifting, costs are kept low, freeing the advisor to support as many direct index portfolios as she likes.
Conclusion
Direct Indexing represents a significant shift in the way advisers can approach portfolio management. It is now possible to offer clients a high degree of personalisation while at the same time, keep costs low and maintain an efficient business model.
About Briefcase
Thanks to our innovative technology platform, Briefcase’s portfolio construction expertise can be utilised by financial advisers to design, implement, monitor and rebalance personalised Direct Indexing portfolios for their clients. It’s a transparent and low-cost approach to investing, yet a powerful one that combines index investing with customisation to deliver truly personalised portfolio for every investor.