The investment arm of Standard Life has issued a warning to investors of smart-beta strategies, saying there is a lack of clarity around the investment objectives of these products.
Smart beta is a passive strategy which selects and rebalances portfolio holdings using certain characteristics to control risks and offer targeted outcomes, at a cost that is generally lower than active managers.
These products have become increasingly popular in recent years but Standard Life Investments said smart beta is more complex than many investors think.
Arne Staal, head of multi-asset quantitative strategies at Standard Life Investments, said investors should be aware of the “pitfalls” of smart beta strategies, including the lack of clarity in investment objectives and their “limited sustainability”.
While he admitted the rapid growth of smart beta strategies gives investors more choice, Mr Staal said complex evaluations are needed.
He advised investors to approach smart beta investing with similar levels of due diligence as they would for active managers.
Mr Staal also said flows into smart beta have been significant and can strongly influence asset prices.
Franklin Templeton trust manager, Carlos von Hardenberg, has echoed this by saying passive strategies are a concern because they can inflate prices when they buy and deflate prices when they sell.
But he pointed out this can present opportunities for active fund managers who take a multi-strategy approach.
However, Andrew Whiteley, director at Proviso Financial Planners, disagreed that there is a lack of clarity around these products.
"Most strategies attempt to enhance the returns available from the traditional benchmark through some form of portfolio tilt, which is pretty much what active managers seek to do without the clarity that a rules-based system brings."
