Thematic investing: Customised indices are the solution, not the problem

Thematic investing: Customised indices are the solution, not the problem

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Criticism of index proliferation risks counting the trees while failing to see the woods – and the real forces at play in the move to give customers control of their own investments.

Naturally enough, some of the indices currently on offer – around 3 million according to the Index Industry Association – will turn out to be plays on investment ideas that don’t work. Most are in fact simple “slices and dices” of existing broad market indices, and the index products that track them therefore provide simple, generic investments.

Custom indices are the solution, not the problem:

Using a “self indexed” custom solution returns fiduciary responsibility to managers who otherwise follow an index they have no involvement in

It allows managers to provide investments that are more closely matched to what investors want, rather than forcing them into a limited set of “vanilla” index products.

The difficulty of some index decisions due to differing investor needs & beliefs – such as the admission of Tesla to the S&P 500 or the exclusion of Chinese companies from indices due to US sanctions – highlight the importance of flexibility and the ability to respond to different client beliefs.

Custom index creation gives clients a chance to build their own beliefs into the indices they track, and to think about the implications of market structure at the outset, while also streamlining operational processes by using leading-edge technology.

And yes – this can be done on a more cost-effective basis by some disruptor index providers.

At Moorgate Benchmarks we know that the index industry is ripe for disruption.

Not by calling for an end to fresh index creation or a retreat from new ideas. But by taking steps to create products that deliver true choice to all investors.

This article is a response to a FT Opinion Lex piece on https://www.ft.com/content/7612b13d-dcbf-491b-80e2-b84991834987

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