Smart beta – Feature
Smart beta is everywhere. It has become ubiquitous in the financial press, developing into one of the most discussed investment strategies of recent times. Debate has continuously surrounded its approach. None other than The Financial Times has noted it is a rather elusive concept.
Its elusive nature can be attributed to the many ways smart beta can be described: systematic beta, alternative indexation, factor investing and alternative beta.
Smart beta can though, simply be defined as a combination of active and passive investing. It is active in that it aims to out- perform an index after taking risk, return and cost into account.
It is passive in that implementation is in the form of an exchange-traded fund (ETF) or index fund but captures themes that have traditionally been part of active strategies, but usually at a much lower fee.
And the reason the outperformance is called smart beta rather than alpha – alpha is associated with a manager’s skill. Since these are passive, no manager skill is involved. The idea to capture such active themes, consistently and inex- pensively, in a passive oriented portfolio, is a powerful and appealing idea. “It is a smart way of thinking about investing beyond traditional active and passive,” says Sara Shores, Black- Rock’s global head of smart beta.
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Smart beta advocates note that it seeks to enhance returns, improve diversification and reduce risk–factors institutional investors adore, and frequently require.
It is, therefore, not a surprise that this is a growing segment for investors. Adoption of smart beta has spread to more than half of asset owners globally, according to a one survey. Is this growth in assets likely to continue? Clive Gilchrist, trus- tee executive at BESTrustees, identifies a difference between defined benefit (DB) and defined contribution (DC) pension schemes towards smart beta, with the latter favouring a so- called ‘tilt’.
“The DB schemes I deal with are substantially de-risked with low or no equity content, to the point where such strategies are not considered,” he says. “In the DC space, various types of climate tilt or ESG tilt are frequently used – and that use is growing.” What then is likely to drive further growth in smart beta: the returns, the diversification or lower fees? “It seems mainly to be driven by perceived risk reduction,” Gilchrist says. Given its sharp impact, smart beta is also viewed as something of a disruptor to active management. “It has been considered as a cheap alternative to traditional active management,” Gil- christ says.
This disruption has included an unprecedented shift from active to passive management due to, it has to be said, the con-
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