These products come with dull-sounding labels such as “custom indexing” or “direct indexing” that belie the radical potential of the approach — a kind of Spotify for investing that allows people to mix their own funds. “Custom indexing really is the thing that’s going to drive the future of asset management,” says Patrick O’Shaughnessy, whose thenUS$6.4 billion ($8.8 billion) firm was scooped up in September by Franklin Resources, the fund manager better known as Franklin Templeton, as part of the trend. “It’s our responsibility to let people make their own choices.”
It is the existential challenge faced by asset managers all over Wall Street: Surrender to the fee-killing exchange-traded fund boom — or keep bleeding assets and risk extinction. Now they’ve hit on a way to fight back.
Investment giants are lavishing billions of dollars in a bet that they can bring the personal touch back to an investing world dominated by mass-market index funds. They include Morgan Stanley and even dominant ETF and index players BlackRock and Vanguard Group. They’re all racing to offer software that can create a unique index for every investor and then let them buy all the shares in it directly. The result? A mashup of active and passive investing that’s supposed to offer the best features of both.
