Custom Indexing and A History of Investment Vehicles

While I am obviously somewhat biased about Custom Indexing, I am genuinely fascinated by this innovation from a – you guessed it – financial history perspective. I’ve written extensively about the history of investment vehicles and their evolution since Abraham van Ketwich first launched the world’s first mutual fund in 1774. Almost unbelievably, since then innovations in investment vehicles have been limited by a structure that “bundles” individual equities into commingled funds. Don’t get me wrong, ETFs and Mutual Funds were clearly important innovations that continue to serve an important functions for most investors. However, Custom Indexing unlocks the benefits of unbundling.

Custom Indexing is exciting because it combines previous financial innovations (diversification, factor exposure, passive beta, tax loss harvesting, ESG) into a single software platform offering true customization at scale. Instead of bundling individual equities into one commingled fund, Custom Indexing unbundles portfolios into baskets of individual stocks, allowing investors to reap the benefits of personalization and sophisticated tax management.

Platforms like Canvas are unique in that they buck the trend of previous investment vehicles. While commingled funds like ETFs and Mutual Funds rely upon pooling assets from many investors in order to offer one low-cost diversified portfolio for all, Custom Indexing customizes to the individual rather than the group. This innovation empowers investors to build low-cost, diversified portfolios individually tailored to their specific preferences and goals. Your goals = your strategy. This was not previously possible.

It is interesting to note that during the first “passive boom” in the 1930s (Fixed Trust movement), an Economist article described something like Custom Indexing today using window shopping as an analogy:

“When buying a shop window, however, you are bound to buy some articles which you do not favor or which you do not particularly prize.”

With custom indexing, you can purchase only the articles you favor. As technology paved the path for past financial innovations by reducing barriers and friction, technological advancements like free trades, cloud technology, advanced data analysis, and many more make Custom Indexing possible today. The latest innovation further democratizes investing by providing financial advisors and their clients with the ability to invest exactly how they please.

To put my BloombergTV segment in historical context, today’s links feature all my previous writing on the history of investment vehicles and their evolution.

Now let’s dive in!

Summary:

“Innovations do not occur in a vacuum. Instead, they often represent the moment that independent paths of evolution and ideas converge, culminating in something entirely unique. This post focuses on the latest financial innovation, Custom Indexing, and its core foundations: democratization of finance, technology, passive beta, active management, ESG, factor exposures and customization…

Understanding that innovations build upon their predecessors, we will look at the development of innovations within investment vehicles and the road to Custom Indexing.”

Summary:

“Demand for customization and products tailored to individuals often arise when a good or service becomes abundant and commoditized. While the field of Finance and Investment is most apt for our discussion, this maxim generally holds true across all industries.

A proliferation of personalized products and services is usually facilitated by a simultaneous boom in new technologies that enable greater efficiency and customization at scale. In this post we will look at an example of customization put to work in an industry outside of finance: automobiles.”

Summary:

“Each of the examples covered in this post illustrate the familiar progression of technological advancements producing an abundance of information, which requires further technological innovations and new systems to analyze and synthesize this data.

Now more than ever we are swimming in a sea of information. So much so that this era has been coined The Age of Information, and it is frequently stated that “data is the new oil”. In this environment there are an increasing number of tools and innovations designed to generate insights from the abundance of data available, and technology helps leverage these insights into actionable steps.

At OSAM, we pride ourselves in following a similar approach to the steps laid out by Karl Karsten almost a century ago. Determine the factors that influence financial outcomes, construct a robust research platform containing normalized data for each factor, and implement the efficacious factors into live-time investment strategies rooted in quantitative processes.

Innovations in technology have enabled us to take our analytical insights and data platform to the next level by offering a software-based interface designed to build customized portfolios for every client. In 1931 Karsten predicted a future in which “very large machines” would use data analysis to construct investment strategies that could be altered and tailored with “dials” representing different factors.

Canvas is our version of what Karsten described, but instead of a very large machine it is a slick and intuitive web-based platform complete with dozens of dials and switches that can be utilized for customizing portfolios. Karsten was on to something in 1931 with his writing of math-based prediction machines, and we believe we are at the frontier of a new era in asset and wealth management powered by technology, software, and data.”

Summary:

“Each of the examples covered in this post illustrate the familiar progression of technological advancements producing an abundance of information, which requires further technological innovations and new systems to analyze and synthesize this data.

Now more than ever we are swimming in a sea of information. So much so that this era has been coined The Age of Information, and it is frequently stated that “data is the new oil”. In this environment there are an increasing number of tools and innovations designed to generate insights from the abundance of data available, and technology helps leverage these insights into actionable steps.

At OSAM, we pride ourselves in following a similar approach to the steps laid out by Karl Karsten almost a century ago. Determine the factors that influence financial outcomes, construct a robust research platform containing normalized data for each factor, and implement the efficacious factors into live-time investment strategies rooted in quantitative processes.

Innovations in technology have enabled us to take our analytical insights and data platform to the next level by offering a software-based interface designed to build customized portfolios for every client. In 1931 Karsten predicted a future in which “very large machines” would use data analysis to construct investment strategies that could be altered and tailored with “dials” representing different factors.

Canvas is our version of what Karsten described, but instead of a very large machine it is a slick and intuitive web-based platform complete with dozens of dials and switches that can be utilized for customizing portfolios. Karsten was on to something in 1931 with his writing of math-based prediction machines, and we believe we are at the frontier of a new era in asset and wealth management powered by technology, software, and data.”

Summary:

“This post looks at the role of investment vehicle innovations for unlocking new risk management capabilities. From diversification through commingled funds to corporate structures limiting liability, investment vehicles provide the underlying structure for investors to execute their risk management processes.”