This content is from: Wealth Management

Quant Shop QMA and Just Invest Partner to ‘Democratize’ Custom ESG Portfolios

PGIM’s $120 billion asset manager is leveraging Just Invest’s platform to offer separately managed accounts with minimums starting at $50,000.

QMA, the $120 billion quantitative unit of PGIM, has partnered with the direct indexing firm Just Invest to build customized portfolios for the clients of RIAs. The new service, PGIM Quant Select, will “democratize” the benefits of separately managed accounts and actively shape the bespoke portfolios, a combination needed in the marketplace, the companies say.

“We have an expertise that's been institutional in nature for our entire history. And for the first time, in a big way, in a customized way, we have found a partner that allows us to bring it into the RIA space. That's a big deal to us,” Adam Broder, head of Global Distribution at QMA, told RIA Intel.

The partnership is a collaboration between a firm skilled in asset management and another with the moxie to deliver it to RIAs, said Jonathan Hudacko, co-founder and CEO of Just Invest. 

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Founded in 2016, Just Invest is a separately managed account platform that financial advisors use to build tax-managed, custom portfolios for their clients. It manages more than $600 million in assets but it is a passive investment solution. For more than three years, Just Invest sought a partner that could send it active signals to shape portfolios and wring out alpha. It first connected with QMA early last year and announced the partnership between them on Tuesday.

“They really, throughout this, have treated us as an equal and made us feel like this is a joint offering,” Hudacko said about QMA.

Advisors will access PGIM Quant Select through PGIM but the partnership could be a boon for Just Invest, which will continue to offer its own core, passive custom beta products.

“As a small company, we see it day in, day out. It's hard to get somebody to pay attention to us. It's hard to get a meeting with a multibillion-dollar RIA because they don't know who we are. To have the association with an organization like PGIM just opens doors in a way that we could never have imagined,” Hudacko said.

PGIM Quant Select offers active, multifactor investing alongside the tax management, customization, and other benefits of traditional SMAs, but account minimums will start as low as $50,000.

Better tax management and customization have become table stakes — those combined with active management and a good platform are the future of the investment industry, Andrew Dyson, CEO at QMA, said.

Executives say the time has come for a product like PGIM Quant Select. The wealthiest institutions and individuals have long used separately managed accounts, which allow them to pick and choose stocks to boost returns, lower taxes, or customize an equity allocation to a client’s liking. 

But a confluence of trends and changes are leading asset managers to develop new solutions. Investors’ increasingly want portfolios conscious of environmental, social and governance factors they can choose. Meanwhile, advisors are looking for scalable ways to customize client portfolios — to appease clients and for risk and tax management purposes. Meanwhile, the elimination of trading commissions has made separately managed accounts more affordable.

“We believe, and have for some time, that there is a sort of latent demand, if you like, for ESG from individuals. But the problem is we lump ESG as a term, so it's just completely homogenous and it's not. People want flexibility. They have their own priorities, their own beliefs and so on. And so we do believe that demand is there,” Dyson told RIA Intel.

Data appears to support QMA’s thesis. Sustainable funds in the U.S. attracted an all-time record level of flows in the fourth quarter last year, of $20.5 billion. Total U.S. sustainable fund flows in 2020 was $51.2 billion, more than double the $21.4 billion in 2019. In 2018, total flows were only $5.5 billion, according to Morningstar.

“Being able to offer something that allows for customization and tailoring down to a client's specific situations and their specific preferences, that market demand is real and it's going to become huge,” Hudacko said.

While some asset managers have called broader adoption of direct indexing “overhyped,” many companies in addition to QMA and Just Invest see opportunity in helping wealth managers offer clients more customized portfolios.

Last spring, Charles Schwab acquired the remains of Motif, a technology company that built custom portfolios but suddenly closed. The deal is expected 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,” Neesha Hathi, an executive vice president and the chief digital officer at Schwab, said at the time.

In October, Morgan Stanley acquired the asset manager Eaton Vance for $7 billion, a deal that included the SMA builder Parametric. Then, in November, BlackRock acquired Aperio Group, a firm that helps build custom portfolios, for $1.05 billion. 

New entrants are also eyeing the expected opportunity in customization. Vise, a startup using artificial intelligence to build and manage investment portfolios for RIAs, has raised $60 million in venture capital funding and recently hired a former computer scientist of Avantis and Dimensional Fund Advisors to lead the startup’s investment strategy.

Prudential Financial’s PGIM manages $1.4 trillion. 

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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