As asset management firms sharpen their focus on personalized separately managed accounts (SMAs), portfolio management will become dependent on quantitative techniques that require more capital to succeed, accelerating consolidation in the asset management industry, according to findings from The Cerulli Edge—U.S. Managed Accounts Edition.

Many asset management firms are working on actively managed SMAs that use the same algorithmic process as direct index SMAs to create customized solutions that track the performance of an actively managed portfolio, broadening the application of direct indexing to encompass active portfolio strategies. Various active asset managers are exploring ways to use the algorithmic techniques to personalize their portfolios for clients, managing them for tax optimization (60%), tax management for accounts that are transitioning (27%), environmental, social, and governance investing (ESG) incorporation (7%), and other factors. These portfolio solutions—direct indexing included—belong to a broader class of products that Cerulli describes as personalized SMAs.

As the quantitative techniques that make direct indexing possible are applied to strategies beyond passive investments, the financial services industry must begin to reckon with portfolio management becoming increasingly driven by quantitative analysis. “The growth of personalized SMAs will accelerate the evolution of portfolio management into a quantitative profession,” states Tom O’Shea, director. “The idea of portfolio managers studying financial statements, traveling to visit companies, and acting on a calculated bet is slowly becoming an anachronism. Increasingly, quantitative tools will be used to make decisions on security selection,” he adds.

Not only will the emphasis on quantitative investing impact the portfolio management function, it will also blur the distinction between being a technology company and an asset management company. “As algorithms take over more of the investment and portfolio construction activities, investment analysis and decision making will involve working with large quantities of data, pulling that data into a computing tool, and creating portfolio solutions as outputs,” comments O’Shea.

The high cost of creating the technological infrastructure to develop and support personalized SMAs will continue to drive industry consolidation. “Mass customization of these processes to handle thousands of client accounts requires scalable network solutions, as well as the computer hardware and technology staff capable of building and supporting these networks,” states O’Shea. “These substantial capital requirements will eventually force firms into the arms of each other as they seek the efficiency that comes from size,” he concludes.