Fund managers adopt smart approach
Fund managers have found a new way to make money as many of them tap into smart beta, one of the fastest growing investment products in recent years.
The product, also known as strategic beta, tracks certain stocks or assets in an index rather than the entire market like a passive or beta fund. It has expanded sharply as it often delivers market beating returns.
Total net smart beta assets have increased sixfold in Europe to €12.2bn over the past five years and fourfold in the US to $315bn, according to data provider Morningstar. It has continued to grow this year, expanding by 5.4 per in Europe so far in 2014 and by 4.1 per cent in the US.
Passive tracker and exchange traded beta funds are growing more slowly but are much bigger at €608bn in Europe and $3.6tn in the US, says Morningstar.
Tim Gardener, head of the institutional client group at Axa Investment Managers, says: “Interest in smart beta strategies has grown significantly. I don’t believe it is a passing trend; it is firmly entrenched and will continue to be attractive to investors.”
It is called smart because in theory it produces better returns than passive or beta funds by picking out parts of the market that outperform, such as small company stocks or undervalued stocks.
Some active management groups have developed the product as it has become harder to produce so-called alpha returns that beat the market. These groups say smart beta offers a winning combination of active and passive management approaches.
It is also popular with a wide cross-section of investors from private banks to rich individuals to some of the world’s biggest institutions. Japan’s Government Pension Investment Fund announced this month that it would be moving some of its money from active funds to smart beta funds.
However, critics warn it is not the holy grail and is similar to active management, which involves a choice in terms of stock or asset selection. This means it has similar risks, they say.
David Lloyd, head of institutional portfolio management at M&G Investments, says: “As an active manager, I am paid to select assets for my portfolio. I think you either choose to go passive and track the market or pick an active manager.”
It is also typically more expensive to buy smart beta products than those of passive funds, where fees have been cut to the bone.
Ursula Marchioni, head of exchange-traded products research for iShares at BlackRock, insists it is still a beta product, but one that provides the opportunity to replicate the best parts of the market. “Passive funds are linked to market cap, which is not always the best way to replicate a market.”
It is not a panacea, she says, but she insists it offers another option for investors seeking higher and more consistent returns.