Will Direct Indexing Boom in Australia like it has in the US?

Our last speaker in the global perspectives is Damien Carson, the Chief Investment Officer from Nuclear's Wealth.

His presentation topic is, well, direct indexing boom in Australia like it has in the US.

Nuclear's Wealth was born from the idea that everyday people should have the transparency, customization and access to quality investment management that is typically reserved for high net worth investors.

They use technology to control costs and ensure efforts are spent on the real job for superior investment outcome.

Damien started Nucleus Wealth after over 20 years in financial markets.

He wanted to come up with an investment solution for ordinary investors that delivers the same type of personalized investment portfolio that high net worth investors use.

Welcome to the presentation, Damien.

Thank you.

Yeah.

So as I said, we're talking about direct indexing today.

And so what I wanted to lead in with was was what is it because a lot of people haven't heard about direct indexing, I want to talk about what's been happening internationally, some ASG considerations, and then how you can actually sort of go about investing within within direct indexing.

So direct indexing is very much a

It's the next iteration in our mind of investments.

So 100 years ago, you go to a stockbroker and they just buy whatever stocks and then eventually we had sort of 50 years ago or so the introduction of index funds and funds where they would buy a range of stocks on the market and try and get the cost down and then deliver that to investors.

From there we went to exchange traded funds or ETFs as they're known and ETFs gave you the same structure but then a much lower cost and also exchange traded.

So you managed to get both your trading costs and your management costs down.

Now the next stage is what's called direct indexing.

And that's where you get to take an exchange traded fund with all of the securities within it.

And you actually get to start dividing up and making changes to that around the edges.

So you get to knock some stocks in or knock them out.

And based on various factors, sometimes it's tax reasons, sometimes it's ethical reasons, sometimes it's you just want some extra exposure to a particular theme.

And so,

In our mind, that's very much where where the markets going and I'll start with sort of, you know, the next part of showing you a little bit about what's been happening internationally in this market where we've really seen some some dramatic growth particularly in the u.s.

four or five years ago, it was a relatively niche product.

The costs have come down, the ability for people to customise has become much easier and it's very much exploded in the US.

They're talking about reaching a trillion dollars within the next few years in terms of money invested in this strategy.

So very much taking over from exchange traded funds and sort of being the next big thing.

If you look at the some of the acquisitions that's been going on.

This is just a you know, a chunk of them over an 18 month period but basically most of the companies that sort of set themselves up to do this within the US have been bought out by the big players.

So Charles Schwab has a has an offering so does Goldman Sachs Morgan Stanley.

BlackRock, JP Morgan, Vanguard, Franklin Templeton, PGIM, and BNY Mellon.

So basically all the big or most of the big players within the US are all putting investment into this area because they also see it as being the next sort of stage for what investors are going to want.

So what are the types of things you could use direct indexing for I've got a table up here that sort of showing that the various different uses you can have for it.

So think of it as basically saying rather than buying say, you know an ASX 100 index yourself and you've got a hundred stocks so sitting behind that in an ETF.

You've actually got all the individual shares.

There's some tax loss things you can do where you can sell sell some of the stocks that have that have had losses and and then buy them back at a later stage and that helps to realize some some some tax gains for you.

You can cut stocks out based on environmental social or ethical reasons.

For example, you might decide you don't want anything to do with carbon and you can take that out of your portfolio and just have the other stocks a bunch of other different factor measures.

There's also

things about some of the rules based strategies you can use in terms of saying, look, I'd like to have more value stocks, or I'd like to have more quality stocks within the portfolio.

And you can set up rules around those.

And that idea is very much that it's, it's a customized portfolio where you're taking a portfolio that you know already works in terms of an index portfolio, and just making small changes to it, rather than having to build everything up from the ground yourself.

An example of how you might do this on our website is, you know, the first thing we do is you choose your base portfolio.

So for example, I've got here, you know, how many stocks do you want in your Australian leaders, whether you know, 15, 25, 75, similar thing in the global, and then how much do you want in the Australian leaders portfolio versus the global leaders portfolio.

So you choose all those.

Then we do what's called tilting.

So you can say, well, I want a little bit extra of say clean energy or battery supply chains or artificial intelligence.

So you pick what extra things you want added into your portfolio and you get sort of a tilt towards those.

And then you pick what you want to screen out.

So a common one for us is so the worst offenders on fossil fuels, sometimes war, human rights, health, you know, vices.

We've got about a hundred different screens and tilts.

that the people can choose from in terms of what they're looking for and how they're looking to change their portfolio.

And then finally, you get to see you know exactly what that means for your portfolio.

So what are what are the stocks are going to be in your portfolio at the one I've shown he's got a investing in the portfolio.

And you can see what's going to get cut out.

So they chose to have no fossil fuels worst offenders, which means they're not going to buy Exxon or not going to buy Procter and Gamble because they've chosen to have no animal testing as well.

Then, yeah, so that's how you put together a portfolio.

Some of the other factors you get that are very beneficial is one is particularly on international, we have fractional shares, so you don't have to buy a whole share.

So if you haven't got, if you're say only investing $10,000 into an international portfolio,

you can buy 0.2 of a Google share or 0.15 of an Apple share that goes into that.

So you don't actually need to have those really high balances.

You can do personalization, customization.

So quite often we'll have people who might be, say, a partner at an accounting firm and they might have a sector they're working on that they can't buy stocks with that.

Or they might be a senior executive at a bank and they don't want to have any banking stocks within there.

So we can customize it back to the individual.

tax efficiencies we spoke about and you can choose either active or passive and the fees are very low so the fees go down to about 10 basis points depending upon how much money you're investing one of the other benefits you get is that you know we can grip accounts together and and the more money you invest the cheaper it can get whereas if you're investing in exchange strategy fund one price for everyone so yes that's the that's the basic features of direct indexing and and what we uh yeah what we think about it

Thank you, Damian.

You explained the concept of direct indexing.

So my question for you is, why hasn't direct indexing taken off in Australia yet?

Yeah, so one of the key drivers behind the US has really been a tax driven strategy.

So so and also the focus on the high net worth.

So within the US, some of the tax regulations have meant that there's there's been a real benefit for direct indexing doing what they call tax harvesting, where I spoke a little bit about it, but basically is you sell the stocks that have gone down, and then you buy them back a few months later.

And that

realises a capital loss, and that's sort of, you can then apply that to capital gains you've made from elsewhere.

In the US, they're allowed to market quite aggressively on that front, and so that's really seen this massive pickup.

And then once that got the ball rolling, and then once people realised how much customisation and how beneficial that customisation was for people about making the portfolio really about themselves, that's what has really driven that next leg of customisation.

you know because one of the things we often talk about is that you know ethical concerns in particular are a little bit all in or all out and so whereas with direct indexing you get to actually choose and customize and what I mean by that is there's people out there who are saying look I don't want any carbon in my portfolio and actually my you know my dad was a problem gambler and so I don't want to have any gambling stocks within my portfolio.

And if you go to a traditional ethical fund, what that means is they'll actually wipe out everything.

They say, okay, well, you don't want carbon, you don't want gambling, but also you're not gonna have alcohol, you're not gonna have tobacco, you're not gonna have all these other factors that we consider to be not ethical.

And they might be things where you're saying, well, actually I don't mind drinking alcohol and I don't mind smoking because I might do it myself or something like that.

And so the part of the direct indexing is really about letting you customize those ethics back to your own needs.

And what are the tax implications for people of direct indexing?

Yeah, so tax wise, it can be very beneficial in terms of, you know, within most managed funds, you're if so if you're a managed fund or a superannuation fund, for example, your tax position depends upon what other people are doing in that fund.

So if you're if the fund you're in bought a lot of shares and made this big capital gains, and then other investors are selling out,

your fund is realizing those capital gains and what other investors are doing is actually affecting your position.

Whereas within a direct index, everything's in your own name.

So if you're buying holding on, you get the benefit of those capital gains all to yourself, you get the franking all to yourself.

And if you're not doing any buying and selling, then you get to hold on to those as much as possible.

And secondly, you also get to choose at the most appropriate standard for you.

So

you know, if you've bought a stock and it happens to be down and then you sell it, or sorry, you bought a stock one at say $5 and then you bought it again at $10 and then you decide to sell at $8.

Well, you can choose within your customization at what price you want to sell it so that you get the best tax outcome for yourself.

And that's not available within ETFs or managed funds.

Thank you, Damien, for your presentation.

Good to see you.

Take care.

Thanks a lot.