PGIM Investments, the asset management business of Prudential Financial, is the latest firm to join the direct indexing trend, announcing plans Tuesday to buy Green Harvest Asset Management, a New York-based separately managed account platform. The deal is expected to close in the fourth quarter.
“With markets near all-time highs and potential tax increases on the horizon, understanding the impact of capital gains taxes and implementing strategies focused on after-tax results are critically important for investors, particularly those in the ultra-high-net-worth category,” said Stuart Parker, president and CEO of PGIM Investments, in a statement. “This acquisition underscores our commitment to meeting the evolving needs of our clients, and we are pleased to welcome Green Harvest on board.”
Green Harvest takes a different approach to direct indexing than some other platforms, creating ETF portfolios that track U.S., global and custom indices for wealth advisors and their clients.
In February, PGIM announced it was partnering with direct indexing tech company Just Invest to launch PGIM Quant Select, a separately managed account service that allows registered investment advisors to build customized portfolios around traditional factor strategies, environmental, social and governance (ESG) factors and tax management. Vanguard announced in July that it would acquire Just Invest.
PGIM joins a joins a wave of deals in the direct indexing space in recent years, in which some of the biggest players in asset management and financial services made broad inroads—essentially betting that the technology to create customizable portfolios for individual clients without, theoretically, abandoning the rules-based characteristics or risk profile of an index is an option that will resonate with investors.
PGIM's move follows Franklin Templeton's announcement in late September that it would acquire O’Shaughnessy Asset Management (OSAM), a quant-based money management firm that has a custom indexing platform.
Cerulli Associates predicts direct indexing to grow 12.4% over the next five years, faster than exchange traded funds (at 11.3%), separate account programs (at 9.6%) and mutual funds (at 3.3%). Tom O’Shea, research director for managed accounts at Cerulli, said direct indexing was a $399 billion market as of the second quarter 2021, but that is expected to grow to $730.5 billion by 2026.
“Given the volume of M&A activity that’s happened in the industry, given the new players that are coming in, we would expect this is going to enhance education; this is going to create more awareness of the category and how it can be applied,” said Bing Waldert, managing director of U.S. research at Cerulli. “Likewise as firms acquire this, they’re not doing this to go head to head with Parametric and Aperio in terms of just doing tax optimized beta investing. I think we’re expecting to see a fairly quick evolution of new applications for the technology associated with it.”