Two years ago we got very excited about a new way of investing that was becoming more common in America and had landed on these shores. We wrote about the arrival of Direct Indexing here.
Two years on and we are now deploying this as an investment strategy for our clients where it fits their needs.
Custom Indexing as it is being called by Fundment, the only UK platform to currently offer it, can be a very powerful way of investing. In essence it directly buys all of the company shares globally rather than having to buy a fund that does the same. This cuts out the cost of buying the fund and so is currently the cheapest way of buying access to global markets. This is all done by Fundment within a client’s GIA, ISA, pension etc.
As well as the cost benefit though, there is also the ability for the first time to build a portfolio that is truly unique to each individual client. This is because, unlike a fund, with Custom Indexing you can exclude any individual company from your portfolio that you don’t want to invest in.
This can be particularly powerful for individuals who have built up exposure to the shares of one company because they work for them or for historic reasons such as inheriting them pregnant with gains. We currently look after past and present staff of Meta, Google, NVidia, Microsoft, Marsh, Phoenix, Aviva and others. Many of these clients have large stock positions in their employers and some even have minimum amounts that they must hold in this stock. The last thing they want to do is double up their exposure by holding the shares of these firms as a part of their main portfolio. All of these firms make up a large part of Global Stockmarkets, particularly the large US tech companies. If you are a NVidia employee and you are buying the S&P500 in your portfolio, then you are currently buying this single share with 15% of your portfolio, in addition, to the amount you may hold as an employee.
The other common problem that Custom Indexing is that of exclusions. Many clients may object to being pigeon-holed as ethical investors when their objectives are more precise. Putting an ethical screen on a portfolio may exclude Armaments, Gambling, Tobacco, Alcohol, Pornography and Fossil Fuels as standard. The issue with this, is that it is the investment management industry’s assessment of what is ethical and what isn’t. Clients aren’t sheep to be herded but individuals, with individual values. The client that cares about Climate Change and wants to avoid investing in Fossil Fuels, may not care one jot about investing in Alcohol. In fact many ‘ethical’ investors tell us that it would be hypocritical to exclude a sector they rather enjoy. Likewise some ‘ethical’ clients contacted us when Russia invaded Ukraine to ask for their Armaments exclusion to be removed.
We have clients that only want to exclude a single sector such as Gambling due to historic family issues with this problem but don’t object to anything else. There are some clients who specifically dislike the behaviour of individual companies that are not normally included in a standard ethical screen.
Custom Indexing is the solution to all of these issues and in our opinion will provide a good low cost solution for many clients. We can foresee a world where individual portfolios get more and more unique to the client and their individual desires.
We have heard push back from the usual suspects in the Investment Management industry, that clients shouldn’t be allowed to exclude so many companies as they don’t know enough about how it will effect their returns. However most Custom Index portfolios, even with broad exclusions, are still more diverse than the average active fund which by its nature needs to select a narrower number of shares to attempt to outperform the index.
Investment management has been evolving for decades now and will continue to do so. It is the direction of travel which is worth noting; lower costs, more diversity, more choice.