INTERESTED PARTIES
“Smart beta has definitely been a growing trend amongst institutional investors,” says Alex Glynn, fundamental and systematic investment analyst at institutional consultancy Cardano.
A growing appetite among pension schemes for the asset class is also something that Andrew Peach, a senior consultant at Aon, has noticed. “We are seeing that it is starting to become more mainstream now.
“We saw it trickle in five years ago but we are seeing a lot more interest now,” he says. The jump in pension schemes gaining exposure to smart beta products is them result of the time it takes for new ideas to bed-in with trustees, who are generally a cautious bunch. This is a problem made worse by trustees not holding regular meetings to discuss strategy. “You might have three or four chances to speak to the trustees in a year.
“Going back five years, priorities were elsewhere,” Peach adds. “Interest rate risk was a big problem and liability driven investing was what people were worrying about, making sure that their portfolios insulated against interest rate and inflation risk.
“Nowadays most pension schemes have done that and are looking at other areas and de-risking growth portfolios is a big topic,” he adds. “So this is one way of de-risking, with a small ‘d’.
Smart beta’s popularity could also be the result of investors thinking more about how they are using equities in their portfolios. “Familiarity makes trustees more comfortable, there is more and more literature on this, it is getting more column inches,” Peach adds.
Also luring investors to the market has been the advent of multi-factor investing, where several factors are tracked in a single fund. Peach describes the multi-factor approach as compelling.
“Before, if you were talking about doing something other than market cap and smart beta, you would possibly get into a single factor. You are just putting all of your eggs in the centre of that.
“That has been distilled further to multifactor,” he adds. “That is a more balanced approached. It is more palatable. Trustees get that, they like it.”
The London Borough of Haringey Pension Fund is one scheme that has been won over by multi-factor, having moved around 43% of its passive equity fund to such products in May. Another investor is the retirement scheme of high street retailer Boots, which invested £7.2bn in a multi-factor fund managed by Legal & General Investment Management (LGIM) in July 2017.
