• Home
  • Equities
  • Fixed Income
  • Alternative Investments
  • Multi-Asset
  • Passive
  • Thematic
  • Events
  • Market Intelligence
  • Investment Week
  • ESG Spotlight
  • Thematics Spotlight
  • Newsletters
  • Sign in
    • You are currently accessing Investment Europe via your Enterprise account.

      If you already have an account please use the link below to sign in.

      If you have any problems with your access or would like to request an individual access account please contact our customer service team.

      Phone: +44 (0) 1858 438800

      Email: [email protected]

      • Sign in
     
      • Account details
      • Newsletters
      • Contact support
      • Sign out
     
  • Follow us
    • Twitter
    • LinkedIn
    • Newsletters
  • Register
  • Events
    • Upcoming events
      event logo
      Women in Investment Festival 2020

      Investment Week, Professional Adviser, Professional Pensions, Retirement Planner and Investment Europe have collaborated to launch the Women in Investment Festival 2020, in partnership with HSBC Global Asset Management.

      • Date: 03 Mar 2020
      • The Brewery 52 Chiswell Street London EC1Y 4SD, London
      event logo
      Milan Forum 2020

      InvestmentEurope's 10th annual Milan Forum will take place on 5th March at the Four Seasons Hotel, Milan.

      • Date: 05 Mar 2020
      • Four Seasons Hotel Milan Via Gesù, 6/8, 20121 Milano MI, Italy, Milan
      event logo
      Nordic Summit Stockholm 2020

      InvestmentEurope's Nordic Summit 2020 will take place on 10-11 March at the Grand Hôtel Stockholm.

      • Date: 10 Mar 2020
      • Grand Hôtel, Stockholm Södra Blasieholmshamnen 8 103 27 Stockholm Sweden, Stockholm
      event logo
      Frabelux Forum 2020

      The 3rd edition of the Frabelux Forum will be held on Thursday, 19th March at the Ritz Hotel in Paris

      • Date: 19 Mar 2020
      • The Ritz, Paris
      View all events
  • Investment Week
  • ESG Spotlight
  • Thematics Spotlight
Investment Europe
Investment Europe

Sponsored by

Sharing Alpha
  • Home
  • Equities
  • Fixed Income
  • Alternative Investments
  • Multi-Asset
  • Passive
  • Thematic
  • You are currently accessing Investment Europe via your Enterprise account.

    If you already have an account please use the link below to sign in.

    If you have any problems with your access or would like to request an individual access account please contact our customer service team.

    Phone: +44 (0) 1858 438800

    Email: [email protected]

    • Sign in
 
    • Account details
    • Newsletters
    • Contact support
    • Sign out
 
  • Alternative Investments

Sustained growth puts smart beta under the microscope

  • Tweet  
  • Facebook  
  • LinkedIn  
  • Send to  

Selectors are increasingly being asked to consider the merits of ‘smart beta’ on behalf of their clients, but opinion on its role in providing superior risk adjusted returns is not clear cut.

Selectors are increasingly being asked to consider the merits of ‘smart beta’ on behalf of their clients, but opinion on its role in providing superior risk adjusted returns is not clear cut.

With markets about to head into a period whereby a raft of data will suggest they have done nothing but gain over half a decade, the ability to spot beta contribution to portfolio performance and find ways to ensure returns are maintained against reasonable levels of risk is likely to become increasingly important.

Related articles

  • Smart beta sets the pace for reform of passive investment sector
  • JPM AM’s Yazann Rohami asks: Is alternative beta 'investable’?
  • Measuring the benefits of Smart Beta
  • Unigestion’s CEO comments on hedge fund manager selection

Smart beta strategies have been growing both in number and by assets gathered, as noted by, for example, Tim Gardener, global head of Consultant Relations at AXA IM – one of the providers of such strategies.

He argues that with investors becoming increasingly aware of return lost by tracking market capitalisation indices, they are looking for alternative strategies that avoid this problem. And with demand continuing, the industry has already moved to a second generation of smart beta (SB) offerings in both equity and fixed income, he notes. “Beta harvesting typically generates over 80% of return.

In consequence more and more investors are looking to this kind of solution to act as the base or core of their portfolio, perhaps then using alpha strategies to generate excess returns on top.”

However, Gardener’s explanation also illustrates why this is a challenging area for the industry in terms of finding common descriptions of what this type of strategy is actually seeking to accomplish.

“Beta strategies have to be understandable, low cost – in terms of management and transaction costs – transparent – to allow us to communicate clearly how the strategy is positioned at any time, and lastly systematic – returns that come from exploiting long run market anomalies rather than taking risk positions to exploit inefficiencies.”

“We do draw a distinction between ‘alternative beta’ which we regard as a useful categorisation of all indices which are not market capitalisation. However to us ‘smart beta’ is about alternative beta strategies which are, in addition, ‘smart’.

“We think to be ‘smart’ you avoid unnecessary risk and costs and focus on the outcome the investor wants rather than on devising different index constructions. Some alternative betas are smart and some are less so. Traditional market capweighted indices are certainly not smart in that they expose investors to sources of structural systematic risk that, over an investment cycle, are under-compensated.”

Still, despite the apparent nuances, from AXA IM’s perspective, the growth in AUM in the relevant strategies suggests it “is not a passing fad, but rather a global trend that is here to stay.”

“The AUM figures for both our credit and equity strategies thus far are encouraging, given their relative youth. The fixed income strategy has €1.3bn in AUM and equity is over €2bn. This type of growth has not gone unnoticed by those offering other ways of investing in beta. For example, Jeff Molitor, CIO Europe at Vanguard, commented last year that SB strategies in some regards
are a new take on sector rotation strategies used by investor in previous times, and that there are still risks as with any type of strategy, such as the propensity to lead or lag behind other types of strategies at different times.

Investors in different markets may also be more or less interested, according to a comment from Emanuele Bellingeri, head of Italy for iShares, the ETF platform of BlackRock.

“Smart beta strategies have seen a huge rise abroad, less so in Italy. As per iShares’ ETFs, we are now concentrating more on placing our products with traditional strategies.”

Xiaowei Kang, senior director Research at S&P Dow Jones Indices, suggests investor demand is being pushed by those seeking alternatives to both passive and active portfolios.

Those seeking alternatives to more traditional active portfolios are estimated to account for two-thirds of the demand for this type of strategy among institutional investors.

The reasons for these searches are fairly clear, he suggests. Those replacing passive portfolios with SB are doing so based on discussion and theories around mispricing and asset prices, and are effectively seeking more efficient portfolios.

Those replacing actively managed portfolios are doing so because the active management has produced disappointing performance.

The change is also based on growing recognition that long term risk premia account for the majority of portfolio returns. Thus, instead of paying expensive fees to active managers, it is possible to restructure portfolios to access return via SB at lower cost.

In terms of the supply side, Kang notes that SB providers come from both camps – active and passive managers. S&P DJI sees this in its capacity as a researcher and provider of indices used to access non-market capitalisation weighted return.

The design of SB products is basically done to allow investors to build risk budgets in a certain way, Kang continues. This in turn leads to offerings in the market such as risk parity type strategies, and ones that control volatility. It comes back to the objective of ensuring better control over risk.

123
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Send to  
  • Topics
  • Alternative Investments
  • Germany
  • Alternative investments
  • Cover story

More on Alternative Investments

InvestiRE SGR and Fondazione Cariplo launch social housing asset manager

  • Alternative Investments
  • 13 December 2019
Fog descends on Channel - Brexit reactions

There has been a deluge of comments following the UK general election, its outcome, and what it means for the Brexit process going foward. InvestmentEurope and its sister titles have been gathering a number of these comments below, and will keep adding...

  • Equities
  • 13 December 2019
Santander launches private equity platform to support Spanish SMEs

  • Alternative Investments
  • 12 December 2019
Evarist Granata, managing director and head of private capital at ACP SGR
Italian boutique ACP SGR launches fintech platform for illiquid alts

  • Alternative Investments
  • 12 December 2019
What investors can learn from foresters and family-owned companies (Part I)

  • Alternative Investments
  • 11 December 2019
Back to Top

Most read

Fidelity launches sustainable water & waste fund for UK investors
Fidelity launches sustainable water & waste fund for UK investors
Neuberger Berman unveils macro opportunities FX fund
Neuberger Berman unveils macro opportunities FX fund
Generali Investments Sicav SRI Ageing Population surpasses €600m in AUM
Generali Investments Sicav SRI Ageing Population surpasses €600m in AUM
Santander bank vows to become carbon neutral in 2020
Santander bank vows to become carbon neutral in 2020
Santander AM hires one to lead new illiquid alts investment area
Santander AM hires one to lead new illiquid alts investment area
  • Contact Us
  • Marketing solutions
  • About Incisive Media
  • Terms and conditions
  • Policies
  • Careers
  • Twitter
  • LinkedIn
  • Newsletters

© Incisive Business Media (IP) Limited, Published by Incisive Business Media Limited, New London House, 172 Drury Lane, London WC2B 5QR, registered in England and Wales with company registration numbers 09177174 & 09178013

Digital publisher of the year
Digital publisher of the year 2010, 2013, 2016 & 2017
Loading