Smart beta’s recent popularity has been driven by an array of different monikers and savvy marketing. As Lynn Strongin Dodds finds, these strategies seem here to stay, but are currently only the preserve of larger funds.
“I am not sure what these strategies will be called in two years, but there is an incentive for the market to keep the nomenclature fresh.”
Ryan Taliaferro
Since the beginning of the year, the UK Pension Protection Fund (PPF) and National Employment Savings Trust (NEST) joined the ranks of the smart beta camp of investors. They have adopted different approaches with PPF opting for minimum variance and NEST focusing on risk management for one of its emerging market mandates. Both underline the versatility as well as the complexity of these offerings.
WHAT’S IN A NAME?
One challenge is that there is no precise definition of smart beta, according to Ryan Taliaferro, senior vice president and portfolio manager of the managed volatility strategies at US-based Acadian Asset Management.
“A number of these strategies have been around for a long time, though under different names,” he says. “Until recently many were calling them fundamental indexation, and now it is smart beta. I am not sure what the strategies will be called in two years, but there is an incentive for the market to keep the nomenclature fresh. If I were going to come up with a definition, I would say ‘smart beta’ refers to a strategy that exploits one or more mispricings within an asset class, most typically equities, and that are linked to well-defined and easily measurable security-level characteristics, such as value, momentum, size.”
Ken Volpert, head of investments Europe, Vanguard also believes that the smart beta tag is misleading. “Anything that deviates away from market cap is active and not beta. However, they are rules-based active strategies and aim to optimise exposure to specific market characteristics or factor tilts. They cost more than a broadly-diversified market-cap index fund but are generally lower than hiring an active manager.”
According to a global survey of 131 US and European asset owners conducted by Russell Investments, the most popular moniker in the former was “alternatively weighted indices” while, in the latter, “smart beta” is the preferred term. Europe is leading the way, with 40% of the region’s respondents making allocations, compared to 24% in North America. In addition, in Europe only 15% do not expect to evaluate smart beta in the next 18 months, compared to 34% in North America.
Overall, though, these strategies have been gaining traction across the world. The main driver is that the dominant market-cap strategies are backward-looking and have not delivered the performance goods.
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