ESG: Institutional Investors Expect Strong Growth in Customized Indexing

Increasingly sophisticated and individualized ESG strategies are key drivers for the continued growing demand of customized portfolio solutions

According to new research (1) from quant technologies provider SigTech, 70% of pension funds and other institutional investors believe demand for custom portfolio solutions will increase strongly. The disruptive market forces of ESG, indexing and digitization are driving this increased demand for customization. Two-thirds of those surveyed (67%) believe it will become one of the biggest growth areas in asset management and is one of the industry’s most exciting developments.

Customized portfolio solutions are bespoke investment strategies that are developed to meet the specific needs of investors. One of the key reasons for growth in this market is that 75% of the institutional investors surveyed said they are becoming increasingly sophisticated in their individual ESG requirements. In addition, investors are finding it difficult to find off-the-shelf products offered by fund managers that are fully aligned with their needs.

41% of participants said they believed fixed income was the asset class with the biggest need for customization, followed by 27% who cited commodities, 18% said equities, and 14% mentioned hedge funds.

When it comes to implementing their individual ESG policies, the study found that institutional investors use a combination of solutions. 65% said they use off-the-shelf products (i.e., without any customization), 60% use customized portfolio solutions with external partners, and 52% said they develop these internally.

Daniel Leveau, who heads SigTech’s strategic initiatives for institutional investors, said: “Investing does not have to be just 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% corresponds to the investor’s requirements. Our research shows that 69% of institutional investors agree with this view.”

(1) SigTech commissioned the market research company Pureprofile to survey 100 pension funds and institutional investors across the UK, US, and Asia. Collectively they have around $935 billion in assets under management.

Interviews were conducted online in September 2021.