Have smart beta strategies lived up to expectations? Perhaps we need to define what we mean by smart beta strategies because there seem to be almost as many as there are DGFs.
Jonathan White: If we avoid the term, we might call it investing in a systematic way. In a broader sense, it’s giving investors a range of choices to invest in a low cost systematic and transparent way so yes, I think it has in a broad definition lived up to expectations so far. There’s clearly a hype associated with the term and we should beware offering too many promises and ensure investment expectations are well set and well-designed. They’re delivering an important tool and we don’t lose sight of their function.
Clive Gilchrist: It is, in principle, a good idea, but one needs to take a step backwards and actually look at what it’s trying to deliver. Even if it does what it says, it won’t do it every year, let alone every quarter – it’s cyclical like other themes within investments. The problem I suspect is in the hands of the users, be they trustees or other investors who are not fully understanding what it is that they’re being asked to look at.
Simon Hill: That’s right. Even if the purveyors don’t set out to overpromise, many trustees hear an implicit promise, or read one. It is natural to try to make the claims for these stand up with some performance data and the natural human response to extrapolate it. We’re fairly clear in our view when we’re talking to trustees about these kind of approaches what it is they’re designed to achieve – it will be different in different cases. There’s a difference between strategies that are essentially aimed at reducing equity risk or volatility – like reweighting from a capped weighted benchmark – and those which are explicitly pursuing factor returns. Different groups of trustees, different schemes at different times will need different types of approaches. But one of the major difficulties with any of these structured approaches is that people tend to believe they’ve found something that will outperform under more circumstances than is probably reasonable. They’ve not disappointed expectations so far, but they’ve not really been tested. We’ve not seen a major rotation in factors yet and not many of them have got very long life records either, so it’s too early to say.
Nick Samuels: I’d agree if we define smart beta as the quite simple approaches used by ETFs or indices, but factor investing obviously has a much longer history. Most managers have robust and attractive track records over a meaningful period of time. But it’s just too early to tell about smart beta because most of the products are pretty fresh. The secondary – and major – benefit is that it’s given the rest of the active asset management industry a bit of a shake-up. It’s having to start to think about how to compete with smart beta, because in some ways it’s come along and is eating its lunch. It’s now very easy to compare a manager with a factor and suddenly those returns don’t necessarily look quite as attractively as they used to and people on our side of the fence now have a better yard stick to judge active managers against. Active managers realise this and are starting to frame their investment process versus the smart beta alternative, which is great. Systematic approaches which look a little bit like smart beta are seeing their fees tumble, which is great for the environment.
White: I agree with everything said and many of these sound very healthy for investors. We are big believers in the benefits of smart beta and risk factor investing as it allows investors to deploy investments
in a different way. We should recognise that this toolkit allows investors to better meet investment goals. That might be a lower volatility profile,
or because the investor has a certain type of pension scheme or insurance company and they can construct and tailor their allocation in
a way which better meets my goals. We mustn’t lose sight of the hype in recent performance and should continue to work on expectation setting and transparency so people really understand what they’re getting.
The rise of multi factor strategies is like the DGF space: the more popular it becomes, the more proliferation there is, making it tougher for advisers to differentiate on behalf of their clients.
Gilchrist: I don’t think a typical investor understands what smart beta is, how it’s composed or the fact that it’s not static. People assume that the index is achievable with no turnover and no cost. Actually index funds do a pretty good job of minimising the transaction cost – but it isn’t zero. People looking at smart beta don’t really understand what their comparator is. Mainstream pension funds don’t use smart beta as much as I would have expected and part of that is a lack of appreciation.
Hill: They use them, but there’s conservatism in the approach and some scepticism about it.
