Smart beta to help drive down costs

Smart beta to help drive down costs

A smart passive approach can help investors get more income compared with traditional investment approaches, Justin Urquhart Stewart, director and co-founder of 7IM, has said.

He said that the team had created a smart beta index for 7IM’s range of multi-manager portfolios, to help avoid the bias inherent in traditional indices constructed according to market capitalisation weighting.

In traditional indices, for example the FTSE 100, the performance of a handful of giant companies can skew the whole index performance, so Mr Urquhart Stewart said the team had created an equally-weighted index to give investors a passive investment without market-cap biases; each holding has the same weighting.

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“Equal-weighting is a simple, very efficient way to produce a value bias within a portfolio,” he said. “We like the value bias – it is a smart passive factor that produces additional returns over time compared with a market cap-weighted index.”

The London-based investment manager has a range of four multi-manager funds, which are highly diversified, actively managed multi-asset portfolios focused on providing steady, above average returns with lower than average volatility.

All four funds – Moderately Cautious, Balanced, Moderately Adventurous and Adventurous – have exposure to the FTSE 100 Equal Weight Index Future.

Mr Urquhart Stewart said 7IM wanted to encourage the futures indexes indices to list more smart passive products so he approached LIFFE futures exchange, which was receptive to the idea of smart beta.

In a process that took six months, LIFFE agreed to create a listed future of this kind, on the basis that 7IM would be keen users.

He said: “Futures allow us to achieve in a single trade what would otherwise entail 100 separate trades. It is also cost-free access to a strategy which has worked well for us.

“It also provides further diversification as it does not suffer from a weighting bias towards very large companies,” Mr Urquhart Stewart added.

Adviser View

Kevin Morgan, director of Hertfordshire-based Consilium Financial Planning, said: “Smart passives are working and a low cost passive fund has added appeal if it outperforms the benchmark, a great feat especially at low cost. This also in light of active funds which rarely beat benchmark consistency.

“Smart beta is growing in popularity and all credit to 7IM for setting up the listed future it uses, it is clearly a product for its time.”