Italy’s institutional investors getting hungry for smart beta

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In Italy, smart beta strategies are gaining traction in both fixed income and risk parity equity solutions across the institutional, wholesale and distribution channels, according to Jérôme Teiletche (pictured), head of solutions group at Lombard Odier Investment Managers.

In the firm’s definition, this means offering a more efficient access to the market with better risk-adjusted returns through liquid, transparent and cost efficient products.

“We are starting to see institutional clients researching smart beta strategies as they recognise that this is an approach that makes sense. It’s a smarter way to be passive because it improves the risk-adjusted returns by avoiding the traditional failings that favour the most indebted countries and follow the market’s bubbles,” he said.

In wholesale and distribution, the interest is also on the rise as on fixed income the sovereign debt risk is high enough to make it essential to reposition a portfolio.

“Smart beta lends to the healthiest economies, not the most indebted, and gives you better risk/return ratios,” Teiletche said.

On the equity side, smart beta strategies provide to be more efficient because clients realise that these strategies don’t overexpose a portfolio to past-winners, and therefore the most capitalised.

With more diversified risk, investors are also able to capture more upside opportunities.

“Our products are aiming to offer structural improvement of client’s portfolio, not in a specific market environment. For instance, Risk Parity isn’t purely a defensive strategy, such as minimum variance which works well mostly in falling markets. Risk Parity is a more nuanced approach that captures value in rising markets and aims to limit declines in falling markets,” Lombard Odier’s head of solutions added.

The asset manager’s product range includes global and euro government debt, corporate debt including the ‘5B’ credit space, inflation-linked debt and emerging market debt in both local and hard currency with $3.6 billion invested in fundamentally-weighted fixed income.

“We also offer clients smart beta on equities, which manage around $700m. Our emerging market risk parity has a track record of more than two years and has delivered strong results. Commodities, which launched more recently, has around $200m under management and we also offer this in versions which exclude agricultural commodities,” he added.

Smart beta solutions are relatively cheap because they add value compared with pure passive and costs can be lower when compared with traditional active management.

“Like any innovation, the challenge is more in educating potential investors as smart beta is a radically different approach to portfolio construction and investing in the market,” he said.

Lombard Odier reports most interest coming from institutional clients, who are increasingly asking questions about traditional portfolios including passive products and see their limitations.

“Other types of client are also becoming more interested in having less market cap bias and other core exposures to asset classes,” he said.

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