Pension funds and other institutional investors are more likely to start developing their own index strategies in-house over the next few years, according to a report from SIGTech.

The firm said the trend was being “fuelled by digitisation of the fund management industry and the growing focus on ESG”, explaining that 'one size fits all' investment products were unlikely to be aligned with individual investors’ specific ESG policies.

It also noted that investors sometimes had difficulties with ESG rating agencies, which sometimes assign “wildly divergent” ESG scores to companies.

Additionally, SIGTech explained that investing in pooled investment vehicles made it difficult for investors to be active owners when compared to direct ownership of a security.

Instead, the firm argued that investors would be better off “tailoring equity investments according to their desired risk factor exposure and incorporating their unique ESG policy”, adding that they need to embrace customisation and direct ownership of securities.

Digitisation was also highlighted as a key factor behind the growth in popularity of in-house index strategies, with SIGTech pointing out that it had resulted in fee pressure for asset management products.

It added that this had in turn led to distribution changes, with service providers now more readily offering specifically catered solutions for a client’s requirements, rather than pre-packaged products.

As such, SIGTech reasoned that custom equity portfolios were expected to become “one of the biggest growth areas in asset management”.

SIGTech head of investing, Daniel Leveau, said: “Five years ago, the idea of creating and executing your own index strategies in-house would have been a daunting task. Today, it is 100 per cent achievable. Custom equity portfolios allow institutional investors to define the investable universe and tailor their investment strategy to incorporate specific ESG policies and to directly hold individual securities.

“By applying the concept of alternative indexing methods, investors can gain exposure to various risk factors that are optimal for them. One might want global equity exposure with larger downside risk, another a larger bias to small caps, whereas a third investor might desire a stable income from dividend payments.

“The same goes for ESG. No two ESG policies are alike. By owning the securities directly, investors can decide to what degree they want to be an active owner through voting and direct engagement.

“Investing is not about searching for an existing product that offers the best possible fit to the investor’s needs. It is about creating a product that 100 per cent fulfils the investor’s requirements.”

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