Institutional investors should avoid paying active management fees for exposure that could be achieved more cheaply and easily through smart beta strategies, Towers Watson believes.
Smart beta funds have increased in popularity recently, claiming to provide outperformance without the fees typically associated with active management.
Towers Watson said its own institutional clients had allocated more than £10bn to smart beta solutions in the past five years alone. During this time, the company had partnered with a number of asset managers to develop 20 smart beta solutions in areas where it felt there were good investment ideas but no desirable investment products, on a net of fees basis.
Smart beta solutions can cover a range of investment strategies that fall in three main categories: diversity or alternative asset classes; long-term themes; and systematic risk premia capture. They range from simpler ideas such as real estate securities and specialist infrastructure strategies to create liquid diversity to doing existing betas better, such as non-market cap weighted equities. They also include more specialist solutions with niche asset managers, such as reinsurance, currency carry and volatility premia.
Towers Watson suggested the appeal of using smart beta solutions, as witnessed by the overall size of its clients’ allocations, is the allowance of greater cost management within a fund without sacrificing diversity and return expectations.
Global head of investment research Craig Baker said: “Smart beta is an area of high innovation that will continue to grow and benefit our clients for many years to come. Asset owners are quite rightly far less tolerant of paying for beta wrapped up as alpha, and the norm will become to split them and pay accordingly. However, with any trend there is always the potential for a bandwagon effect and investors need to maintain vigilance around price and proposition.”
He added: “Smart beta is about trying to identify good investment ideas that can be structured better, whether that is improving existing beta opportunities or creating exposures or themes that are implementable in a low cost, systematic way.”
Robeco senior researcher and portfolio manager Patrick Houweling said: “Investors are looking at allocating to smart beta rather than asset classes as a whole and are looking for managers to do this.”
However, Towers Watson said smart beta was not a substitute for good active management but allowed resources to be focused on active management in areas where one cannot systematise exposures.
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