Mark Fawcett, CIO at NEST confirms that it is definitely a possibility “if we can identify low cost strategies that could offer improvements upon, or diversification benefits alongside, market cap approaches”. In July, the DC scheme added two new emerging market equity funds including the smart beta HSBC GIF Economic Scale Index GEM Equity fund. It weights companies by various metrics which represent their true economic footprint and has a style bias towards value while benefitting from the effects of regular re-balancing.
“NEST’s investment approach takes considerable care to keep both explicit costs and any drag on performance to the minimum needed to generate healthy and sustainable performance for all our members,” says Fawcett. “Lower trading and transaction activity results in significant reductions to the performance drag (the cost) to our members’ retirement pots.
“We pick the strategies we consider offer the best combinations of sustainable riskadjusted returns and value for money, and overall we believe that strategic asset allocation rather than stock picking is generally a more consistent driver of performance. Whenever active management is considered we have to be convinced it’s worth paying extra management fees and incurring extra transaction costs.”
TAKING THE ROUGH WITH THE SMOOTH
According to a joint research project by Aon Hewitt and Cass Business School, the 13 different alternative indexing approaches they investigated all produced superior risk-adjusted performance relative to market cap-weighted indices between 1968 and 2011. A cap-weighted index of the top 1,000 US stocks generated annualised returns of just 0.4% since the start of 2000, compared with 6.2% for an equally weighted and 6.9% for a minimum volatility index.
Patience though may be required at times. “They are not all weather indices,” says Bourcier. “One of the benefits of minimum variance is that it offers downside protection and mitigates the drawdown when the market is falling. However, investors will not get 100% of the upside when the market rises in a low volatility environment.”
James Price, investment consultant at Towers Watson adds: “Investors should fully expect all these smart beta strategies will underperform, some for multi-year periods. They need to think carefully about their objectives and then assess how these strategies can help when used alongside traditional passive and active. There are three reasons for choosing smart beta – risk management, cost savings and simplification of a complicated portfolio.”
Comments