Smart beta – Feature
annual growth rate of 22.8%, according to consultancy ETFGI, making this a record year for Factor ETFs The UCITS Factor ETF category has grown by 25% each year for the past five years and while ETF growth headlines have been taken over by sustainable and thematic ETFs – the ‘factor’ category has been growing steadily. “Portfolio managers continue to use factors to position their portfolios to changes in the economic cycle, whether position- ing for economic growth or building resilience, Factor ETFs are effective tools to help achieve desired portfolio objectives,” says Anthony Kruger, EMEA head of Factor ETFs for iShares.
Covid impact The creation of effective Covid vaccines created a huge demand for value focused ETFs as investors sought out companies that were exposed to accelerating economic growth coming out of global lockdowns. “We have also recently seen investors using quality ETFs to build portfolio resilience as markets have become more turbulent and inflation worries are grabbing headlines,” Kruger says. Single Factor ETFs continue to be the leading category, either for tactical or strategic asset allocation complimenting existing positions or providing diversification at the core of the portfo- lio. Institutional investors seem to be turning to Factor ETFs in favour of active products for cost and/or performance reasons. “We see these applications of Factor ETFs as the main driver of future growth, as investors seek these broad, persistent drivers of return available in transparent, low cost, liquid vehicles,” Kru- ger says. “All investment decisions are active, and Factor ETFs are tools that can complement and enhance these decisions.”
Carbon tilting Nest revealed it is expanding its activities in private markets, such as green infrastructure, where the required investment for the transition to the low carbon economy is potentially lim- itless. And here Nest incorporates factor driven tilting when investing in its public equity funds to manage the portfolio’s exposure to carbon emissions, something that has proved to be highly successful.
“The climate tilt allows us to increase investment towards com- panies successfully managing the transition to a low-carbon economy and underweights or even excludes companies that are failing to position themselves for the new economic reali- ties,” Fernando says.
“This allows us to benefit from a passive approach to keep costs down while simultaneously, over the longer term, reducing the climate risk facing our members as global economies transi- tion away from fossil fuels,” Fernando adds. “We believe this will help protect member returns.”
But, Fernando says, smart beta needs to be understood by investors, especially in terms of risk. “There’s still a role to play in using fund managers to actively navigate alternative asset classes, such as commodities and private credit, where exper- tise in the various markets and specific technology is impor- tant,” she adds. “All investors need to carefully consider the risks and rewards of passively entering a market to ensure it fits the level of risk they are willing to take.” As even similarly named smart beta funds can yield uncontrolla- bly different results, especially over shorter periods of time. “In- vestors need to do their homework,” says Ben Johnson, director of global exchange-traded fund research at Morningstar. “They need to sharpen their pencils and do every bit as much of due dil- igence when vetting these strategies, vetting their processes.” It has been predicted that in the future, active portfolio man- agement will be divided into two distinct categories: smart beta, with lower fees, and ‘pure alpha’ at higher costs, which would be set up by only a few managers with above-average research and financial engineering capabilities. With the view that an asset manager should not try to do both smart beta and pure alpha but focus on one of the two strategies. Looking at smart beta, Youssef Louraoui notes in his paper that investor prudence is key: “The smart beta approach may enable investors to increase portfolio performance while managing factors such as portfolio outperformance, portfolio volatility relative to the market, or portfolio diversity.
“It is a tool that must be used prudently in order to be able to confirm at the end whether it is smart.”
SMART BETA IN SHORT
The smart beta approach is constructing a portfolio based on several yield enhancement ‘factors’:
– Quality, which studies the financial environment of the underlying asset.
– Volatility, which filter assets according to their risk.
– Momentum, identifies trends in the selection of as- sets to be retained by focusing on stocks that have performed strongly in the short term.
– Growth, the approach that aims to select securities that have strong return expectations in the medium to long term
– Size, which aims to classify according to the size of the assets.
– Value, which seeks to denote undervalued assets that are close to their fundamental values.
This approach is opposed to the classic vision of portfo- lio construction based on market capitalisation weightings.
Source: Is smart beta smart? by Youssef Louraoui, ESSEC Business School
Issue 108 | November 2021 | portfolio institutional | 43
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60
