Weekly Market Update: ECB Extends QE and Reflation Rally Continues
Stocks had a positive week in the US and globally, with many hitting new all-time highs and the S&P 500 posting consecutive record levels over the past three sessions. On the week, the S&P and DJIA each gained 3.1%, while the Nasdaq surged 3.6%. After the historic OPEC agreement and talks with non-OPEC producers this weekend expected to be fruitful, cuts set by the oil cartel last week seem to be real. And with a Fed rate decision also on the horizon, the markets have heavily discounted a likely hike in December. In the past, the dark shadow of higher rates pushed stock prices down, whereas now expected corporate tax cuts and deregulation have more than offset the higher cost of money.
The market rally was also given extra fuel by the hoped-for extension of the ECB asset buying program. The market reacted positively after Thursday's meeting, which saw the ECB extend purchases, but at a reduced amount. ECB President Draghi said purchases will continue through Dec 2017, an extension of 9 months, while the size of purchases will be reduced to $60B from $80B as of April 2017. Under the current macro narrative, bonds are the target, with the inevitability of higher interest rates and a larger federal budget pushing prices lower. Over the week, 10-year Treasuries gained 7bps in yield going from 2.39% to 2.46%, while 30-year bonds were hit harder, gaining 9bps, from 3.06% to 3.15%.
In corporate news, President-elect Trump gained some market attention by targeting both the pharmaceutical industry and Boeing in some pointed comments. On Tuesday, Trump told Boeing through Twitter that the price of its next delivery for Air Force One was too high and would have to be renegotiated, and on Wednesday, the president-elect stated in an interview that drug prices would have to come down, which sent pharmaceutical sector plunging and the NASDAQ Biotechnology Index down 3% on the day. The financial sector was one of the big gainers this week, rising 4.4%, helped by interest rate normalization and a high probability of easier capital requirements. The Italian financial sector was an exception, with banks selling off after Italian voters said "no" to constitutional reforms that would have smoothed capital raising by Monte Paschi and other banks. Energy deals were busy this week: Glencore is said to be in the final stage of a deal to buy 19.5% of Russian Rosneft at €10.2B, while a Macquarie-led consortium plans to buy a 61% stake in the UK National Gas grid for $7B, with the Qatari Government involved in both deals. Also Sky disclosed it received a takeover approach from 21st Century Fox, which already hold a 39% stake.
SUNDAY 12/4
(CN) CHINA OCT CAIXIN CHINA SERVICES PMI: 53.1 V 52.4 PRIOR (16-month high)
*(HK) HONG KONG NOV COMPOSITE PMI: 49.5 V 48.2 PRIOR; highest since Mar 2015; 21st consecutive month of contraction
(IT) Italy PM Renzi: My govt ends here (resigns as promised); Turnout was higher than anyone expected; Italian people have spoke
(IT) Italy referendum early exit polls shows "no" vote ahead on PM Renzi's proposed Constitutional reforms
(AT) Austria Presidential election: Center-left candidate Alexander Van der Bellen defeats far-right Norbert Hofer by 53.3% to 46.7% margin
MONDAY 12/5
*(EU) EURO ZONE DEC SENTIX INVESTOR CONFIDENCE: 10.0 V 14.3E
*(US) NOV FINAL MARKIT SERVICES PMI: 54.6 V 54.9E (lowest since Sep 2016)
*(US) NOV ISM NON-MANUFACTURING COMPOSITE: 57.2 V 55.5E
(US) Nov Labor Market Conditions Index Change: 1.5 v 0.2e
*(AU) RESERVE BANK OF AUSTRALIA (RBA) LEAVES CASH RATE TARGET (OCR) UNCHANGED AT 1.50%; AS EXPECTED
TUESDAY 12/6
*(DE) GERMANY OCT FACTORY ORDERS M/M: 4.9% V 0.6%E; Y/Y: 6.3% V 1.6%E
*(EU) EURO ZONE Q3 FINAL GDP Q/Q: 0.3% V 0.3%E; Y/Y: 1.7% V 1.6%E
*(US) Q3 FINAL NONFARM PRODUCTIVITY: 3.1% V 3.3%E; LABOR COSTS: 0.7% V 0.3%E
(US) OCT FINAL DURABLE GOODS ORDERS: 4.6% V 3.4%E; DURABLES EX TRANSPORTATION: 0.8% V 0.5%E
LNKD: EU approves Microsoft-LinkedIn merger with conditions, as expected - press
(US) Atlanta Fed GDPNow: cuts Q4 GDP forecast to 2.6% from 2.9% on Dec 1st
VA: Justice Department approves Virgin-Alaska merger, as expected
9984.JP: President-elect Trump tweets: "Masa (SoftBank) of Japan has agreed to invest $50 billion in the U.S. toward businesses and 50,000 new jobs"
*(AU) AUSTRALIA Q3 GDP Q/Q: -0.5% (first contraction in 5 years) V -0.1%E; Y/Y: 1.8% V 2.2%E (lowest annual pace since 2008)
WEDNESDAY 12/7
*(CN) CHINA NOV FOREIGN RESERVES: $3.052T V $3.061TE (5th straight month of decline and largest monthly amount since January; Lowest level since Mar 2011)
*(IN) INDIA CENTRAL BANK (RBI) LEAVES REPURCHASE RATE UNCHANGED AT 6.25%; NOT EXPECTED
*(UK) OCT INDUSTRIAL PRODUCTION M/M: -1.3% V 0.2%E; Y/Y: -1.1% V 0.5%E (largest decline since 2012)
*(UK) OCT MANUFACTURING PRODUCTION M/M: -0.9% V +0.2%E; Y/Y: -0.4% V +0.7%E
*(PL) POLAND CENTRAL BANK (NBP) LEAVES BASE RATE UNCHANGED AT 1.50%; AS EXPECTED
(US) President-elect Trump: will bring down drug prices - Time Magazine
*(CA) BANK OF CANADA (BOC) LEAVES INTEREST RATES UNCHANGED AT 0.50%; AS EXPECTED
ALR: Abbott seeks to terminate $56/shr cash Alere acquisition; files complaint seeking termination in the Delaware Court of Chancery
(US) Association of American Railroads weekly rail traffic report for week ending Dec 3rd: 553.1K carloads and intermodal units, +2% y/y (third straight week of gains)
COST: Reports Q1 $1.17 (ex $0.07 benefit from legal settlement) v $1.19e, R$28.1B (including member fees) v $28.4Be
*(JP) JAPAN Q3 FINAL GDP Q/Q: 0.3% V 0.5%E; ANNUALIZED GDP: 1.3% V 2.3%E (3rd straight expansion both quarterly and annualized)
*(CN) CHINA NOV TRADE BALANCE $44.6B V $46.9BE
THURSDAY 12/8
(CN) China Passenger Car Association (PCA): China Nov retail auto sales at 2.42M, +19.8% y/y
*(EU) ECB LEAVES MAIN 7-DAY REFINANCING RATE SEEN UNCHANGED AT 0.00%, AS EXPECTED
*(EU) ECB POLICY STATEMENT: EXTENDS ASSET PURCHASE TARGET UNTIL DEC 2017 (9-month extension); SCALES BACK PURCHASES TO €60B AFTER APRIL
*(US) INITIAL JOBLESS CLAIMS: 258K V 257KE; CONTINUING CLAIMS: 2.01M V 2.05ME
(EU) ECB chief Draghi: To buy €60B in QE from Apr until Dec; reiterates that program can be amended if needed - prepared remarks
*(EU) ECB chief Draghi: discussed option of continuing QE at full €80B for 6 months, decided instead to reduce QE to €60B in April - Q&A
(US) Fed reports Q3 Financial Accounts: Household Change in Net Worth: $1.59T v $0.84T prior
*(CN) CHINA NOV CPI M/M: 0.1% V 0.7% PRIOR; Y/Y: 2.3% (7-month high) V 2.2%E
*(CN) CHINA NOV PPI Y/Y: 3.3% V 2.3%E (3rd straight y/y positive print; 5-year high)
FRIDAY 12/9
*(FR) FRANCE OCT INDUSTRIAL PRODUCTION M/M: -0.2% V +0.6%E; Y/Y: -1.8% V -0.6%E
*(FR) FRANCE OCT MANUFACTURING PRODUCTION M/M: -0.6% V +0.7%E; Y/Y: -1.5% V +0.1%E
LLY: Provides detailed study from failed Alzheimer's drug Solanezumab trial
*(US) DEC PRELIMINARY MICHIGAN CONFIDENCE: 98.0 V 94.5E
SKY.UK: Discloses possible offer for Sky plc by 21st Century Fox at £10.75/shr in cash; forms independent committee to consider proposal terms
(US) Atlanta Fed maintains Q4 GDP forecast at 2.6%, no change from Dec 6th
(US) Weekly Baker Hughes US Rig Count: 624 v 597 w/w (+4.5%) (4th straight weekly increase)
Anheuser-Busch InBev to Consider Ad Buying Review for 2017
Anheuser-Busch InBev NV is considering a review of its massive global ad buying business following its recent $100 billion-plus takeover of beer giant SABMiller.
"As a leading CPG company, it is part of our best practices to regularly review our approach to our media operating model," said a spokeswoman in a statement. "Following the combination with SABMiller, we are currently assessing our media planning and buying model and whether a global media agency review would be required."
The world's largest brewer is seeking to hire a consulting firm to help it review its existing ad buying practices and potentially conduct a review, according to people familiar with the matter.
AB InBev and SABMiller collectively spent $1.08 billion on U.S. measured media in 2015, according to estimates from ad-tracking firm Kantar Media.
AB InBev, which houses brands like Budweiser, Corona and Stella Artois, currently works with a long list of ad buying firms, including companies owned by ad giants WPP PLC, Publicis Groupe SA, Dentsu Inc. and Interpublic Group of Cos.
A review could begin in the second quarter of 2017, and cover a number of markets, including North America, Europe, Asia Pacific, Latin America and Africa, among others, according to the people familiar with the matter.
While the brewer's motives aren't immediately clear, a megadeal typically prompts a move to consolidate agency relationships in an effort to cut costs. combining media budgets could also provide the brewer, and its agencies, with even more sway over media companies, leading to additional cost savings.
AB InBev has already said it is seeking $1.4 billion in annual cost savings from the SABMiller deal. Marketing is typically a place that companies seek to find cost savings following mergers.
AB InBev has a reputation for slashing costs and has in the past pressured ad firms over the fees its pays for services.
Still, the consolidated beer business would be a prize for any agency. That is, if they make it through the potential review process.
AB InBev in September got the final stamp of shareholder approval for its SABMiller deal, and in October the company dropped the SABMiller name and began trading as a combined company.
Italy’s President Set to Ask Paolo Gentiloni to Form New Government
Matteo Renzi resigned as prime minister last week after ‘no vote’ in referendum on constitutional reform
ROME—Italy’s President Sergio Mattarella has summoned outgoing Foreign Minister Paolo Gentiloni to the presidential palace later Sunday, suggesting that Mr. Gentiloni is in line to become Italy’s new prime minister.
Later Sunday morning, the president is expected to give Mr. Gentiloni the mandate to try to form a new caretaker government. If Mr. Gentiloni accepts, he will then start consultations with the other political parties to form his team of ministers.
The development could signal a rapid resolution to a government crisis sparked by the resignation this week of Prime Minister Matteo Renzi, who stepped down after a stinging defeat in last Sunday’s referendum on a constitutional reform he heavily backed.
In choosing Mr. Gentiloni, Mr. Mattarella is reaching for a seasoned politician who enjoys cross-party esteem in Italy, something that can help him navigate the political tensions that have exploded since Mr. Renzi’s resignation.
Italian parties are now pushing hard for elections to be brought forward from their current timetable of spring 2018.
However, the country needs a new electoral law before Mr. Mattaralla can dissolve parliament because of a court challenge to the current law. Moreover, there are two different electoral rules for each of Italy’s parliamentary houses, a situation that would likely produce a hung legislature.
Mr. Gentiloni enjoys wide support within the center-left Democratic Party, the largest party in parliament. He also has a good relationship with former Prime Minister Silvio Berlusconi as a result of Mr. Gentiloni’s stint as communications minister in the mid-2000s. Those relationships could help him with the complicated task of rewriting voting rules just as an election looms.
Mr. Gentiloni is also highly regarded on the international front. Having joined the Renzi government as foreign minister in October 2014 after Federica Mogherini stepped down to become Europe’s foreign policy chief, he has spearheaded Italy’s efforts to gather international support for a solution to the Libyan crisis.
After holding consultations with the other parties, Mr. Gentiloni will choose his ministers and then the new government will be sworn in. The premier and his new cabinet will then be required to win confidence votes in each of Italy’s two parliamentary chambers to take power. That will likely happen before this Thursday, allowing Mr. Gentiloni to represent Italy at a European Union summit that day.
Russia is deploying anti-ship missile systems, air defenses, and nuclear-capable missiles to its Kaliningrad exclave on the Baltic Sea - press
Analysts have detected construction of permanent housing for mobile missile systems that are capable of being armed with nuclear weapons in a move that some experts see as Russia expressing its displeasure with NATO policies. Kaliningrad, located between Poland and Lithuania along the Baltic Coast, has previously had nuclear weapons deployed within its territory but this latest move is seen as an escalation. - Source TradeTheNews.com
Technology will not replace humans in the financial markets
People are still the best judges of soft data, says Man GLG’s Pierre-Henri Flamand
Recently I watched a computer playing a game that I’d enjoyed as a boy — Pong. It is one of the oldest computer games, in which a bat bounces a ball against blocks, attempting to destroy them all. The computer was terrible at first, but by the end of 600 iterations, it was unbeatable, learning from its mistakes not only how to win, but how to win in the swiftest possible time.
It’s an innocuous example, but one which illustrates the significant advantages that computers have over humans in the performance of routine tasks.
Goldman Sachs recently announced that two-thirds of all trades on major stock exchanges are now carried out by computers. Despite this, we strongly believe that humans still have a central role to play in the financial markets, and will do for the foreseeable future.
Let’s consider one element of our fundamental research process — the visit to a company’s management. Human beings are deeply social creatures, with the ability to use instinct, to read body language and to judge atmosphere.
It’s hard to imagine a computer knowing precisely when to ask the killer question of a chief executive, and how to judge the response. The portfolio manager will have seen numerous similar management teams and will be able to measure the chief executive’s answers versus his or her experience of similar situations.
Will computers be able to get a feel for the culture of a company, for how the employees are being motivated, for the ambience on a factory floor?
The answer is maybe — but not yet. Deep learning is moving quickly and is making advances which, until only recently, seemed unimaginable. There is technology in development that will analyse company conference calls, letting portfolio managers know not only whether the management is telling the truth, but also how confident they are in what they’re saying.
In our view, however, such analysis will for some time yet, still need to go through a human portfolio manager who can synthesise it into an effective investment decision.
We were recently told by the head of research at a leading investment bank that 2016 would be the first year that he had not hired a single analyst. All of his recruitment budget went on technology and people to operate that technology.
Humans will have an integral part to play but it is not unfair to say that the investment firm of the future is likely to look very different to its current incarnation.
We think that there will be fewer people, and many of those who are there will be tasked not with executing trades and analysing results, but with designing and validating algorithms, with maintaining and optimising the vast amount of technology that will be needed. At the same time, we believe that it will still be humans, rather than machines, making the most important decisions of all.
All this technology will merely support human functions in the efficient execution of routine tasks, rather than replacing them wholesale.
For the time being, humans do fundamental analysis better than machines and I believe this will remain the case for some years, perhaps decades, to come. People judge the calibre of soft data about companies better than computers.
Chief executives are human — illogical, impulsive, unpredictable — and it takes a human analyst to predict the vagaries and eccentricities of their behaviour. As such, we believe that humans will continue to be the ultimate decision makers in the investment process, utilising the advantages that technology confers.
Pierre-Henri Flamand is the chief investment officer of Man GLG
EU rivals eye £1.2tn asset pot in UK as Brexit looms
Uncertainty over future passporting rights puts mandates for European clients at risk
Luxembourg, Ireland and France have begun circling a £1.2tn pot of assets managed in the UK for European investors, exploiting the growing uncertainty about Brexit and its potential impact on the investment industry.
Rival fund centres to the UK believe Britain’s status as the European asset management hub for pension and insurance cash is under pressure following the country’s vote to leave the EU, offering them the chance to lure business away.
The UK’s asset management industry is a world leader in so-called segregated accounts or mandates, individual pots of cash managed for big investors such as pension funds and insurers. These mandates account for £3.3tn of the £5.5tn managed by the UK investment industry, according to the Investment Association, the trade body for asset managers.
The fear is that some of the estimated £1.2tn overseen by UK investment managers for European clients in segregated accounts might be at risk after Brexit. This is because of local rules requiring some European pension funds to ensure their assets are run by EU asset managers or simply because of a preference for such an arrangement.
Denise Voss, who chairs Alfi, the Luxembourg fund association, says the grand duchy sees Brexit as a “big opportunity” to grow its share of Europe’s segregated accounts business. It is Europe’s largest fund domicile, with a focus on regulated investment funds known as Ucits.
“Luxembourg could become a hub or at least an important centre for EU segregated mandate business currently managed out of the UK,” says Ms Voss.
Ireland, Europe’s second-largest fund domicile, has equally set its sights on the UK’s pool of assets. Kieran Fox, director of business development at Irish Funds, the trade body, says: “We are doing everything we can to speak to everyone possible in order to ensure Ireland is as ready as it can be to provide solutions to asset managers looking at their options post-Brexit.”
Pierre Bollon, chief executive of the Association Française de la Gestion Financière, the French trade body for asset managers, adds: “The mandate market is very important in France. It is just as important as the fund market.
“[Brexit could mean] investors prefer to have a mandate managed inside the European Union, and Paris is the ideal place.”
Just last week, Morningstar, the fund rating giant, announced plans to move its investment management operations for European clients from London to Paris amid concerns about the impact of the UK vote to leave the EU.
Asset managers across the EU have long relied on the passporting regime that enables asset managers and other financial services companies to sell services across the single market with ease. Once the UK leaves the EU, however, it is not clear whether British asset managers will find it as easy to access and service European investors.
At the heart of asset managers’ problem is the so-called Mifid license. Mifid, or the Markets in Financial Instruments Directive, is a sprawling set of European rules that set out how investment services can be provided across the EU.
If the UK opts for a hard Brexit, asset managers could find their Mifid licence is no longer valid, leaving them unable to access or service some European clients. Companies such as Legal & General Investment Management, Capital Group and M&G only have Mifid licences in the UK.
In countries such as Italy, local rules require pension funds to use EU-based investment managers, meaning asset managers that are registered under Mifid in the UK face being locked out of these markets in future.
Some institutional investors also have internal guidelines requiring them to use an EU-based investment manager, says Ms Voss. Others like knowing they are using a fund house that is regulated within the EU, believing this offers them more protection. “Even if the [trustees at] pension funds are not required by regulation to contract with an EU-based manager, they may take more comfort in doing so,” she adds.
Fund houses with large operations in the UK are now grappling with the question of how they will continue to service European clients when the country leaves the EU. Sean Tuffy, head of regulatory intelligence at Brown Brothers Harriman, the US banks, says: “The segregated account issue may be a potentially big headache for UK asset managers.”
Owen Lysak, senior associate at Clifford Chance, the law firm, says the hope among many British asset managers is that the UK will be deemed as “equivalent”, meaning it is granted special status as a so-called third-country because its rules are similar to the EU’s. This would allow investment houses to continue running money for EU pension funds and other big investors, he says.
“I would expect the UK to ultimately achieve third-country status. I can’t imagine a situation where the UK was not able to manage money [for some EU pension funds],” adds Uner Nabi, executive director within the wealth and asset management team and an expert in Mifid at EY, the consultancy.
If the third-country status does not come through, however, or there is a gap until it comes through, then asset managers might have to think about whether they need an EU Mifid subsidiary.
Some asset managers are unwilling to take the risk of potential restrictions when dealing with EU mandates and are already looking to set up a Mifid-regulated business in another European country. Ms Voss says: “The uncertainty [following Brexit] is so great. From our discussions with asset managers, they are not waiting.”
It is understood that several international asset managers that have a Mifid licence in the UK are in discussions with regulators in various EU member states about establishing operations outside Britain in order to continue to access European clients.
Mr Tuffy says: “There is a high likelihood that UK [companies] will look to establish Mifid [companies] in the EU, and Luxembourg and Ireland are well placed to become home to these new Mifid [companies].”
Jorge Morley-Smith, a director at the Investment Association, adds: “We are speaking to [companies] who say they have plans to set up an EU Mifid [company].
“If you are selling funds in Italy and Spain, there may be local rules in Spain around how you sell funds, which means it is easier if you have an EU Mifid [company].”
But getting a Mifid licence comes with challenges, not least that it can take months or even years. In terms of where to apply for a Mifid licence, “big on the list is ease of dealing with the regulator. In some countries it can take many months and be quite admin heavy,” says Mr Lysak.
Fund houses are also likely to need to relocate or recruit staff for these entities, which is good news for countries that want to attract Mifid businesses. Mr Tuffy says: “The big question is how much substance these [companies] will need to have. No European regulator is going to allow so-called brass-plaque entities. These new Mifid [companies] will have to be staffed.”
The expectation is that while these companies might employ 20 or so people, portfolio management would be delegated back to a business in the UK. Luxembourg and Dublin hope they can also attract more portfolio management staff.
Much of this will depend on politics and negotiation. With so little information available about what Brexit will mean for the investment management industry, the success of Ireland, Luxembourg and France’s attempts to win business from the UK remains uncertain.
Mr Nabi says: “Whether rivals manage to capitalise on that opportunity ultimately depends on what proportion of the asset managers feel sufficiently nervous to make a move.”
Fund providers reject warnings over smart beta’s potential to go ‘horribly wrong’
Funds that mix active and passive approaches have proved very popular
Even set against the sharp rise of index investing over the past half decade, the popularity of smart beta strategies stands out. Yet demand for the products has reached such a level that some of their biggest adherents warn they could soon become victims of their own success.
As the growth of smart beta shows no sign of abating, fund providers have continued to roll out products designed to act as a halfway house between active and passive management. Global assets in smart beta products — which work by tweaking a passive investment approach to generate above market returns — have grown by close to 600 per cent since 2008 to $707bn at the end of October 2016, according to data provider Morningstar.
But such rapid expansion has prompted even the strongest proponents of smart beta investing to voice concerns. Rob Arnott, whose company Research Affiliates created the world’s first smart beta indices, warned this year that some strategies could go “horribly wrong”.
Smart beta strategies typically exclude stocks that have demonstrated extreme volatility. However, product proliferation and funds aggressively chasing performance could ultimately leave investors nursing heavy losses, he warned.
“Are we being alarmist? We don’t believe so. If anything, we think it’s reasonably likely a smart beta crash will be a consequence of the soaring popularity of factor-tilt strategies,” Mr Arnott wrote in a research paper.
Mr Arnott argued that if all smart beta products simply chase performance, then perhaps they are not very smart at all. Yet concerns voiced by the so-called “godfather” of smart beta have done little to diminish strong investor appetite.
According to a survey published in November by Invesco PowerShares, a smart beta exchange traded fund (ETF) provider, more than 71 per cent of investors surveyed indicated they are willing to increase their smart beta allocation. The research revealed a high level of satisfaction among smart beta users, with 96 per cent stating the vehicles performed as expected.
Bryon Lake, head of Invesco PowerShares for Europe, the Middle East and Africa, says Mr Arnott’s comments should not be interpreted as an attack on smart beta. “In many ways [Mr Arnott] put smart beta on the map. He was saying investors need to do their due diligence, whether it’s active, passive or smart beta. They need to understand what they are buying,” Mr Lake says.
“One of the benefits of investing with smart beta ETFs is that they are 100 per cent transparent. You can see the ETF holdings and investors have the ability to understand what is in an ETF.”
One of the reasons behind the continued success of smart beta is a growing awareness of the investment approach among investors, says Mr Lake. “Portfolio builders are becoming experts in using smart beta and have a better understanding of how they can use it,” he says.
Others believe intense criticism that active funds have received for consistently failing to outperform their benchmarks is spurring investors to hunt for alternative investment vehicles with an active flavour.
Deutsche Asset Management, which has $1.5bn in smart beta ETF assets according to consultancy ETFGI, expects further smart beta growth with investors using the products as “an ideal substitute for underperforming actively managed portfolios”.
Unsurprisingly, product providers are keen to prove Mr Arnott wrong when it comes to his concerns about smart beta.
“It is not only about chasing performance,” says Martin Weithofer, head of strategic beta at Deutsche Asset Management. “Strategic beta building blocks can play an important role in improving the risk and return characteristics of a passive portfolio, especially if we are talking about relative or absolute risk reduction. It’s also a cost-efficient alternative in a low-yield environment.”
However, others believe Mr Arnott’s comments could be justified, as smart beta products are no less fallible than other mainstream strategies.
Robert Holford, head of strategic consulting at Spence Johnson, an adviser to asset managers, says: “Things could go horribly wrong with smart beta in much the same way that value strategies run by fundamental managers could go horribly wrong during a crisis.”
He adds: “Concerns are justified that people are loading up in certain areas, but smart beta providers are aware of this and have introduced value elements to make sure they are not loading up on the most expensive stocks.”
Deutsche’s Mr Weithofer rejects accusations that the chasing of performance among smart beta funds could lead to investors experiencing losses on a similar scale experienced by quant funds in August 2007.
During a one week period, several quant-driven hedge funds suffered heavy losses on the back of the subprime mortgage crisis, causing a sell-off among funds pursuing similar strategies.
Mr Weithofer says the situation is very different for ETFs that are highly diversified, track indices as closely as possible and do not take on debt.
“This is a million miles away from concentrated long/short funds with high leverage as we’ve seen in the past,” he says.
“There is little evidence to suggest that there is any more of a propensity for a bubble to form in smart beta than there is in standard beta.”