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November 24, 2020 at 05:31 PM
BlackRock’s acquisition of customized index provider Aperio Group, announced Monday, is set to broaden the offerings of the world’s asset manager for financial advisors. It also could help popularize an investment strategy for separately managed accounts — known as direct indexing — and shake up competition in this area, several industry experts say.
For BlackRock, the $1.05 billion acquisition is “just another bolt-on deal that adds to its capabilities, but it’s not a big mover on its own at the forefront,” said Greggory Warren, senior equity analyst at Morningstar.
More specifically, the deal adds to BlackRock’s capability of tax-managed SMAs in its model portfolio structure, which Warren says “might come in handy if personal tax rates for the wealthy go up in the near to medium term” — a possibility after Joe Biden assumes the presidency.
Aperio Group offers customized SMAs focused on after-tax performance, including accounts portfolios focused on environmental, social and governance (ESG) factors.
“ESG is a big component here, and growing, although tax efficiencies are probably the biggest driver,” said Tim Welsh, CEO and founder of Nexus Strategy.
‘Future of Investing’
Direct indexing is “truly the future of investing,” and the fund industry recognizes it, Welsh explained. “The operating basis points they get form mutual funds and ETFs are rapidly becoming irrelevant and widely expensive compared to what directing indexing can do.”
“It’s no surprise the biggest players are rushing in to buy these capabilities to protect their turf,” such as Morgan Stanley, he added. Its recent purchase of Eaton Vance includes Parametric and its direct indexing platform; the deal also creates a firm with about $4.4 trillion in total assets.
Earlier in the year, Charles Schwab acquired Motif Investing’s intellectual property and key staff. “We intend to leverage Motif’s platform to build on Schwab’s existing capabilities and help accelerate our development of thematic and direct indexing solutions for Schwab’s retail investors and RIA clients … ,” said Chief Digital Office Neesha Hathi in May.
Schwab’s total assets — including those just acquired from TD Ameritrade — were nearly $5.9 trillion as of Oct. 31. This means it’s still behind but getting closer to BlackRock’s $7.8 trillion.
Competitive Landscape
With about $300 billion in assets, Parametric dominates the direct indexing space and has roughly 10 times Aperio’s assets, according to Ben Johnson, director of global exchange-traded fund research for Morningstar.
Schwab could eventually offer its own direct indexing product as a result of its Motif acquisition, Johnson explains.
But the overall asset level in this investment space is small, he points out. Plus, direct indexing is really a continuation of asset management’s evolution — which has moved from mutual funds to ETFs and now includes more customized ETF products.
Other direct indexing providers include Shaughnessy Asset Management’s Canvas platform, launched in September 2019, and an offering from Folio Institutional, which Goldman Sachs acquired earlier this year.
