Seven Investment Management (7IM) is ditching much of its exposure to traditional tracker funds and plans to invest in ‘smart beta’ products in its fund of passive funds range, saying they offer reliably superior returns.
Smart beta products vary from traditional trackers, which aim to simply replicate the make-up of a benchmark index such as the FTSE 100, by for example equally weighting constituent companies rather than weighting them based on market capitalisation.
7IM chief investment officer Chris Darbyshire said the group’s Asset Allocated Passive (AAP) fund range would own significantly more smart beta by the end of the year.
Mr Darbyshire also indicated that 7IM would be willing to put money into new smart beta products to encourage more product development in this sector.
The wealth manager has already shifted part of the four AAP portfolios into such products. In the £851.8m AAP Balanced fund all of the US equity holdings are smart beta products, as well as its holdings in private equity, infrastructure and emerging market debt.
Mr Darbyshire said he would like to see the “majority” of portfolios in such products.
“Smart beta is a big theme for us and we think we can get better performance from them as smart beta products outperform on average by 2 per cent per annum,” he said.
He said there would not be an increase in fees for the investors in AAP funds in spite of the increased use of smart beta products. Instead he argued the underlying costs could get cheaper as 7IM would be getting better deals on funds that helps to launch.
Mr Darbyshire said: “This is a substantial move and it is driven by the ability at add value while staying within a passive approach, the additional control that smart passive provides over portfolio volatility, and the desire to match smart passive strategies more closely with our tactical views.”
Mr Darbyshire said he particularly favoured equally-weighted index trackers - rather than the normal market-cap weighted approach - because of the natural ‘value bias’ of equally-weighted indices.
