Bespoke investment strategies are gaining favor among big institutions as they scramble to offer clients more choice amid the ESG investing boom.
A survey of firms that oversee $935 billion showed 70% of global pension funds and institutions believe demand for custom portfolios is set to increase strongly. Two-thirds of respondents in the poll by technology provider SigTech — a spin-out from hedge fund Brevan Howard — reckon it’s poised to be “one of the biggest growth areas in asset management.”
The results chime with moves in the industry, where major players like Vanguard Group and BlackRock Inc. have been scooping up bespoke benchmark firms. A combination of new technology, cheaper trading and client demand has them racing to offer the benefits of indexing — like low costs and diversification — but tailored to investor tastes.
Custom indexes are developed to meet specific fund needs that aren’t being met with off-the-shelf products. Three-quarters of those surveyed said they have individual requirements for securities that meet environmental, social, and governance rules. About two-thirds said they struggle with ESG ratings because they can provide widely divergent scores at a company level.
Currently, 52% of the investors surveyed by SigTech said they develop these solutions internally.
- When considering what impact ESG will have on their investment activities, 43% of the investors said the environmental factor is most important. Nearly one in three said social factors are, and 26% selected governance as their main focus
- 41% of participants said fixed income was the asset class with the biggest need for customization, 27% chose commodities, 18% said equities
- When asked which ESG factors would have the biggest impact on how pension funds and other institutional investors invest over the next three years, 85% said they expect the focus on climate action to increase, followed by affordable and clean energy at 68%, and good health and well-being at 63%
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