Smart beta transparency woes remain

Smart beta transparency woes remain
Information about smart beta

Firms operating in the rapidly growing smart beta space are still failing to provide a number of details dubbed “crucial” by investors, in a development that emphasises the growing scrutiny of such products.

In its 2016 European ETF and Smart Beta Survey, the EDHEC Risk Institute highlighted a gap between how badly investors desired a piece of information and how easily available they considered this to be. 

Liquidity and capacity questions were judged to be the most important topic for those surveyed, with a score of 4 on a scale of 0 to 5. However, information was “relatively difficult to obtain” here, according to respondents. Other areas such as the composition of an index also appeared to cause concerns. 

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“Even relatively basic information such as the index construction methodology is not judged to be easily available (score of 3.14) relative to its importance (score of 3.85),” said the report. 

“On the contrary, information about recent performance and risk over the past 10 years is among the least important for respondents, with a score of 3.07, but it is also one of the most easily available, exhibiting one of the highest scores (3.12) across the board in terms of availability.”

The scores did show an improvement on previous years in some quarters, such as improvements to the accessibility of smart beta product information more generally.

The research comes at a time of growing prominence for the smart beta space. The products, which seek to offer a more targeted approach than conventional passives, with lower costs than actively managed vehicles, have been growing in popularity.

The research found that 67 per cent of respondents used ETFs to invest in smart beta last year, marking a substantial increase from 2014’s 49 per cent figure. 

On top of this, 94 per cent said they planned to boost their investment in smart beta products over the next three years.

Growing scrutiny of the products has accompanied this rise.

Earlier this year Investment Adviser reported a number of qualms among researchers and fund buyers, some of whom highlighted that factor-based products with ostensibly similar approaches could offer divergent returns, in part due to differing index construction methods. 

These differences have proved significant in some cases. Data shows that the FTSE World Value index had outstripped its MSCI World Value counterpart by 33 percentage points over a 10-year period.

Such concerns appear not to have diminished investors’ appetite for fresh innovation in the smart beta space. 

When asked what type of products they would like to see developed further in future, 34 per cent of respondents pointed to emerging market equity ETFs.

Nearly as many called for further work on ETFs based on multi-asset indices.