Smart beta can cut fund turnover, says Husselbee

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Smart beta can cut fund turnover, says Husselbee

Fund selectors’ increased use of smart beta products may help them reduce their turnover of active managers, Liontrust’s John Husselbee has suggested.

Fund buyers looking to capture short-term trends can do so through the growing range of smart beta products, the multi-asset head believes – meaning active holdings can be “left alone” in pursuit of long-term outperformance.

Mr Husselbee said: “There’s an argument for less turnover with active managers as we substitute with things like smart beta.

“We are looking at value versus growth. Growth had a great year and outperformed in most major markets. If you want to tilt that, why not do it through smart beta? You can then get active managers to outperform over the long term.

“We want [active] managers to be persistent with their approach. Therefore we have to leave them alone to some extent.”

Smart beta products – offering exposure to market factors such as value and alternatives to market cap weightings within an index – appear to be on the rise.

In a 2015 report, research firm Spence Johnson calculated the overall European fund-based smart beta market – both retail and institutional – had reached €132bn (£98.3bn) in 2014. It predicted this could rise to €340bn by 2019.

It estimated that institutions accounted for 63 per cent of this 2014 market, but predicted “faster growth” on the retail side in future.

The report said: “By 2019, our estimates suggest faster growth in the retail/wholesale market, combined with a possible maturing of institutional demand, will cause a slight shift in the make-up of the smart beta client market.”

It added retail assets could rise from €49bn to €146bn.

Mr Husselbee recently turned to smart beta using Dimensional Fund Advisors products.

He said: “They have quite an institutional approach but one very much based on academia. It’s on the back of value and small-cap performance. This is a smart beta play.

“We looked at investing in small cap and in the open-ended world it’s hard to find something reasonably priced because it’s actively managed – though we bought into Dimensional more because of their approach.”

He added: “I think we will get better portfolios based on a three-tier effect: active management for long-term performance, smart beta for performance over 18 months to three years, and beta to rebalance if there is a sell-off.”

Lately, the Liontrust manager has also added to the H20 MultiReturns vehicle and taken on a new holding, the Pyrford Global Total Return fund, which was opened up to retail investors last year.

“We like both funds because they are based on processes. If I’m going to expose my clients to alpha, I want to understand when a process is going to be weak or strong,” he said.