THE LONG AND THE SHORT OF IT
The marketing pitches smart beta, which is also known as alternative indexation, as a bridge between the higher fees paid to active managers and sweeping up some of the gains missed by traditional passive index- tracking strategies.
There is more to smart beta than tracking a certain index of equities. It can also be applied to other asset classes, such as fixed income, and can be used on long and short strategies.
“Intuitively it feels wrong to group long only and long/short strategies together when quoting asset figures and to mix different asset classes,” Glynn says.
To get the best out of such strategies, asset owners should consider the impact it will have on the rest of the portfolio.
As an example, Glynn points out that using smart equity beta strategies to enhance long-only equity exposure is a low impact decision “in the grand scheme of things”.
“A far more impactful decision for the client would be to take steps to establish a diversified multi-asset portfolio; it is here where the right alternative risk premia strategy could provide meaningful diversification to a portfolio risk heavy in traditional betas,” he adds.
A NOT SO PERFECT WORLD
A persistent low growth environment since the financial crisis that started in 2007 and concern over fees has lured many institutions to passive products.
The £67bn that found its way into European passive mandates in 2016 has had a major impact on asset managers, some of which have had to merge to survive. One such deal saw the creation of Standard Life Aberdeen when Aberdeen Asset Management and Standard Life merged last summer.
Factor investing has been designed to wipe out the inefficiencies of passive investing. One of the criticisms levelled at traditional tracker funds is that they are weighted towards mlarger companies, which could be considered by many to be overvalued, and carry lower exposure to smaller growing businesses that could be trading on more attractive multiples.
Smart beta seeks to exploit inefficiencies in passive investing, where higher weighting towards the larger companies pushes up mtheir price and thus makes them less attractive.
But the industry has become the victim of its own success, according to Glynn.
“The multitude of different smart beta factors that investors could target has exploded. This has created unnecessary complexity for investors in selecting the right combination of smart beta factors.
“While any one factor may add value, combining multiple factors is more likely to produce consistent performance. But targeting multiple specific factors one at a mtime can be very costly.
“For example, in smart beta factor investing in equities, one factor like “momentum” may recommend purchasing a position in a stock like Amazon whilst another factor like “value” may recommend selling that same stock. Implemented separately, these create unnecessary trading costs.”
