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Guide to smart beta
Your IndustryApr 20 2016

Advantages of using smart beta strategies

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Advantages of using smart beta strategies

Smart beta can help provide specific outcomes to meet clients’ particular objectives.

Although the concept of smart beta seems more complicated, Chris Mellor, executive director, equity product management for Source, believes it still carries the advantage of clarity that comes with being a passive investment.

He says: “They offer the benefits of passive funds, such as increased transparency, and a consistent approach compared with actively managed funds.”

Clarity is important, says Dave Gedeon, vice-president and head of research and development for Nasdaq Indices. “As investors seek more nuanced ways of capturing certain exposures, a rules-based approach becomes more valuable.

“The rise of the smart beta index gives them exactly what they need: it uses the best data to create an index where they can see exactly what their investment is doing, and have immediate liquidity.”

They give retail investors new tools allowing for much finer control over risk and return drivers Ben Seager-Scott

Because they go “beyond geographical or market-cap considerations in traditional passive strategies, smart beta products serve portfolio construction in a multitude of ways”, says Bryon Lake, head of Invesco Powershares EMEA.

A study conducted last year by BBH Exchange Traded Fund Services, in partnership with ETF.com, found advisers’ primary reason for choosing smart beta was split roughly equally between seeking higher returns than traditional market cap exposure, reducing risk and looking for lower correlation compared with traditional market cap indices (see Pie Chart).

Risk

By using smart beta, investors can gain exposure to their desired index, without suffering as a result of correlation to the index performance.

Eric Shirbini, global product specialist for ERI Scientific Beta, says one key advantage is better performance than a standard cap-weighted index for the same level of risk, but said investors needed to have a longer time frame in mind.

Chart: Why advisers choose smart beta for their clients

Source: BBH/ETF.com

He explains: “It is important to point out this improvement in performance will only materialise over a long time horizon.”

“Certainly on a risk-adjusted basis there can be advantages”, says Martin Weithofer, head of strategic beta at Deutsche Asset Management.

Diversification

Mr Mellor calls diversification a key benefit, as the flexibility the product offers beyond the usual ‘follow the index’ market cap weighting means investors can have more control over what they have in their portfolios.

“Smart beta enables investors to finely tailor their portfolios, not just in terms of geography and size, but using a host of other factors”, he says.

Ben Seager-Scott, director, investment strategy for Tilney Bestinvest, agrees: “I’d say they give retail investors new tools allowing for much finer control over risk and return drivers, the sort of tools institutional investors have had for ages.”

There’s also the benefit of diversification across multiple factor smart-beta products, rather than sticking to just one strategy, as Mr Shirbini points out: “The performance improvement for smart multi-beta products comes sooner than for a smart beta index only exposed to a single factor.”