The COP26 conference in Glasgow ended recently. One of the main themes of the conference was how global financial institutions could work to finance the path towards net-zero. Former Governor of the Bank of England, Mark Carney, led a group pledging $130 trillion of private sector assets to achieving net-zero greenhouse gas emissions. All very well. But the problem is nobody seems to believe them.
Chris Hohn, a billionaire financial backer of climate-related NGOs, accused the banks of attempted greenwashing. “I’m not fooled by them, I don’t think the general public is fooled by them,” he told Reuters. The Financial Times said that Carney’s $130 trillion pledge was “too big to be credible.”
This is just one recent example that reflects a deeper, wider-ranging malaise with the banks. The simple truth is that few people trust financial institutions anymore. The notion that they are safe custodians of our money and our economies was perhaps irrevocably shattered by the financial crisis of 2008. With increasing digitisation also enabling individual retail investors to participate in the financial markets without the involvement of big banks, people are unsurprisingly taking matters into their own hands.
This is a trend that Swiss FinTech company ALLINDEX is looking to capitalise on. They are aiming to “democratise customised investments” – allowing individual investors to build customised indexes in a self-service fashion in order to reflect their own ambitions and beliefs. They are seeking to enable people to bypass the listed Exchange-Traded Funds (ETFs) – which they may not trust or like – and instead leverage direct indexing to create bespoke passively-managed portfolios, something that was previously only available to the ultra-wealthy. To discuss this, we spoke to CEO Christian Kronseder.
The fundamental purpose of ALLINDEX, Christian told us, is to allow the quick and easy creation of tailored indices which can help both institutional and individual clients to build “customised passive portfolios:”
“An ETF is an effective passive instrument. But it’s not customised. You have to pick from what is on the shelf.
“But with us, you can build your own passive portfolio, customised to your needs. So you can say, for example, I want a portfolio that has my twenty favourite stocks or I want to take an existing ETF and change a few things – throw stuff out, or put more or less weight on certain stocks. We have the platform that allows you to build indices which provide this flexibility. If you have enough funds, you can launch your own ETF based on them, otherwise, you can use, for example, structured products, physical replication or fractional shares to reflect your desired allocation.”
One of the major benefits of such products, in Christian’s opinion, is that it is a “more reasonable, conservative instrument for long-term wealth-building than, for example, apps that are focusing on single-stock trading.” As a technology provider, the nature of the platform implies “we don’t have a religion when it comes to indices” – individuals are free to expose themselves to any combination of constituents, including riskier stocks if that is their wish. That said, Christian believes that “in very general terms, building a portfolio and holding it for the long-term is usually a better strategy for non-professional investors than trading on volatile single stocks.”
ALLINDEX also addresses the emerging popularity of crypto currencies, which are also supported on the platform:
“For example, if you want to invest in crypto and you’re not sure which one of these cryptos is going to take off, but you’re bullish on crypto as an asset class, then you can build a crypto index. We have included digital assets onto our platform; given their steady price feeds, we can create indices for them, just like with equities. Hence, our clients can build a portfolio of their favourite crypto currencies. If you have, say, 15 digital assets in your index, even if some of them tank completely, in the current market environment you would still make a good return overall because the asset class as a whole is growing – while it is much harder to anticipate the evolution of a specific crypto currency.”
Looking back at COP26 and its wider implications, perhaps one major trend that ALLINDEX is particularly suited to, is that of ESG investing. Many retail investors cite ESG concerns as one of their top priorities when it comes to allocating their portfolio; a recent Gartner report said that 85% of investors considered ESG factors in their 2020 investments. Yet at the same time, many do not trust green portfolios amidst widespread claims of greenwashing. After all, between 2018 and 2020, “European asset managers had to strip the ESG label off $2 trillion in allocations.”
Christian believes that one of the major advantages which the ALLINDEX platform brings to clients, is related to sustainability and stewardship. It allows investors to decide for themselves which combination of assets they deem worthy to be called an ESG-friendly portfolio:
“There are three ways you can approach the ESG issue. One is exclusions: from an existing index, you can filter out companies that don’t align with your values or worldviews, these are often in the fields of tobacco, alcohol, gambling or weapon manufacturing.
“The second way to go about it is reducing the weight of certain companies. Institutional investors like large pension funds, based on their investment guidelines, need to stay close to certain benchmarks and hence cannot go all the way to exclude several companies which constitute a major portion of an index. However, they can overweight those they find to be more responsible corporate citizens and underweight others.
“The third option is the construction of thematic indices for your portfolios. If you want to go full on and just say, “I believe that in the future everything is going to be green and solar,” you can build a portfolio that’s all about green energy and nothing else. That’s an effective way to reflect strong convictions.
“So these are three ways you can implement your very own ESG views. And actually you can implement these different strategies in the most customised way when you leverage direct indexing.
“As for greenwashing, with direct indexing you will never have that problem: we let every client construct their own definition of ESG on our platform. Because of our business model, we cannot do greenwashing as we don’t sell products with a label, claiming them to be green. What we offer, is a platform which allows everyone to customise their own, passively-managed portfolio. We don’t put any claims on any portfolio; it’s the client who based on their worldviews and beliefs decides how to construct their portfolio.
“We see this as an effective way to help everyone get to the world they want to live in, in terms of financial exposure and the influence that comes with it. Ultimately, this gives the power back to the investor and puts publicly traded companies under pressure to act responsibly, as with direct indexing – more than ever before – they are under the scrutiny of the public eye and cannot hide behind anyone’s green label.”
There is another factor that makes direct indexing an attractive value proposition for investors: tax-loss harvesting. When it comes to passive investments, tax-wise, ETFs are regarded as a single instrument while with direct indexing, the same exposure is looked at in the context of single stocks. This can help manage tax liability; investors can decide to offset capital gains on certain securities with losses of others, thereby reducing the overall tax burden. Christian points out that ALLINDEX’s focus on customisation can help investors benefit from this opportunity to minimise tax liabilities:
“Tax-loss harvesting is popular in certain countries – it works well in the US and is one of the main drivers of direct indexing. It doesn’t work in all jurisdictions; for example in Switzerland, since there you cannot write off losses on stocks from your tax bill. But in countries where it is practiced, you can harvest tax-losses. With an ETF, when the markets go up, the overall performance is positive, so you will pay positive tax. Now if you break down an ETF into a portfolio of single stocks, there will usually be some stocks that perform well and others that perform badly. You can offset those losses with the gains.”
And what does the future hold for ALLINDEX? According to Christian, the aim is to offer an ever-greater array of asset classes, investment themes and functionalities so that clients have as much choice as possible. This of course fits in with the wider strategic purpose of the company, which is to facilitate customisation:
“We are adding asset classes. We have recently added fixed income and digital assets. Fixed income is something that few direct indexing companies are currently offering – most are looking only at equities.
“The other important area for us, is the increase of the number of thematic universes on our platform. We want to have many more thematic portfolios on our app which clients can choose from, since we find that people, especially the young generation, like to invest in trending topics rather than, for example, country indices, off-the-shelf ETFs or mutual funds. They love the fact that they can further customise those portfolios or build their desired exposure from scratch.
“And finally, cryptos. For us it’s systemic – it’s an industry (and societal) trend. We enable clients to obtain exposure to this space in a somewhat more balanced way if applying broader indices, rather than betting on a few digital currencies they’ve heard of.”
It certainly seems that ALLINDEX is poised to take advantage of a growing trend in the world of finance and trading – individuals feeling empowered to take matters into their own hands. With their software being provided on a “white-label basis,” they have found that some institutional clients are finding the web platform useful. The platform is used by their internal teams as well as end-clients, engaging in index design collaboratively – leveraging in-house know-how and market insights. That said, the app, which is distributed in a B2B2C fashion, is “catching up” and has the potential to become a major driver of revenue for the company.
With many investors feeling disillusioned with the big banks, ALLINDEX could be well-positioned to provide the tailored, personalised service that many appear to be after.
Author: Harry Clynch
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