Global investment manager Franklin Templeton is the latest firm to get into the direct indexing business, announcing plans Thursday to acquire O’Shaughnessy Asset Management (OSAM), a quant-based money management firm in Stamford, Conn. OSAM launched its custom indexing platform, Canvas, which now represents $1.8 billion in assets, in 2019. OSAM manages a total of $6.4 billion in assets, as of Aug. 31.
Franklin Templeton says the acquisition will strengthen its capabilities in the separately managed account space; the firm currently manages $130 billion in SMA assets.
“Technological advances are reshaping how financial solutions are delivered, and we continue to invest in innovative technology to enhance client outcomes and their experience,” said Jenny Johnson, president and CEO of Franklin Templeton, in a statement. “Custom Indexing is aligned with our commitment to bringing sophisticated customization to a broader investment audience, and I’m excited to welcome the OSAM team to Franklin Templeton.”
The news follows Franklin Templeton’s acquisition about a year ago of AdvisorEngine, the digital wealth platform and technology provider.
Canvas is a web-based platform that allows advisors to design and maintain custom indexes in separately managed accounts and tailor those indexes according to their clients’ specific needs. The term that has gained popularity in the industry is “direct indexing.”
“Custom Indexing represents the next progression of investing through Indexing, ETFs, and Direct Indexing,” said Patrick O’Shaughnessy, CEO of OSAM, in a statement. “As part of Franklin Templeton, we’ll have the opportunity to accelerate client growth at Canvas and continue to add to existing OSAM offerings.”
Once the deal closes, which is expected in the fourth quarter, OSAM’s 40 employees will join Franklin Templeton’s product solutions group. The deal also includes OSAM’s intellectual property, investment management processes and principal business assets.
Franklin Templeton 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.
In early October 2020, just days after completing its purchase of E-Trade Financial, Morgan Stanley announced it would acquire Eaton Vance for $7 billion, which includes its Parametric business, a leader in offering low-cost, highly customizable, separately managed account products—in other words, direct indexing. And in November 2020, the world’s largest asset manager, BlackRock, announced it would acquire Aperio, which provides customized index equity SMAs, for $1 billion in cash.
And more recently JPMorgan Chase & Co. agreed to buy OpenInvest, a financial-technology firm that offers a custom indexing solution, and Vanguard announced its acquisition of Just Invest, a wealth management technology company with a direct indexing offering.
Portfolio management and trading solutions provider Vestmark recently announced it was doubling down on direct indexing, with plans to build out a more robust fractional share trading capability.
“It’s really now become the perfect-storm environment to do direct indexing because you got the tech, you got fractional shares, you got zero commissions, you’ve got the algorithms, trading and rebalancing. Why not? Now if you’re an advisor, you almost fiduciarily will have to move into this space, because if you’re defaulting into a mutual fund or an ETF, you’re actually costing the client potential gains,” said Tim Welsh, president and founder of Nexus Strategy in Larkspur, Calif.
