Unwanted volatility from so-called ‘smart beta’ products mean that many advisers and investors will need more convincing to include these funds in portfolios, experts have said.
Cerulli Associates, a global research and consulting firm, said smart beta products were supposed to minimise volatility but statistics have suggested they do not always meet this objective.
"The basic goal of these strategies is to limit losses on the downside, while capturing a decent chunk of the upside," said Barbara Wall, Europe managing director at Cerulli.
"For a long time, the products did exactly that. But in the second half of 2016, it all started to go wrong, with a raft of statistic showing that so-called 'min-vol' products had higher volatility than the mainstream indices over long periods."
Smart beta refers to a passive investment strategy which selects and rebalances portfolio holdings using certain characteristics to control risks and offer targeted outcomes. The cost is generally lower than active managers.
These products have become increasingly popular in recent years, and investments in the products reached a record high in November, according to independent research and consultancy firm ETFGI.
In October a study found advisers concerns about smart beta products had dropped, despite recent warnings from Standard Life Investments.
Arne Staal, head of multi-asset strategies at Standard Life, said smart beta is more complex than many investors think.
He said that investors should be aware of the “pitfalls” of smart beta strategies, including the lack of clarity in investment objectives and their “limited sustainability”.
Ms Wall said overall market volatility had been very low by historical standards in recent months, which could have created a recent bad run for volatility based stretches which may merely be an aberration.
“Gaining from smart beta's outperformance may take patience. Smart beta will not work every time. But if it can work at least some of the time, it can help enhance returns, and should continue to play a part in the portfolios of investors, especially those with realistic expectations,” she said.
rosie.murraywest@ft.com
