Smart beta is “flavour of the month”

Smart Beta provoked some of FundForum’s most extensive and impassioned debates.

An investment strategy forum discussion dedicated to the topic saw smart beta dubbed an "inexorable monster" that has "risen from the depths" to become a dominant factor in the industry, by JB Beckett of Gemini Investment Management.

Marco Corsi, head of iShares' product research and innovation team, put smart beta's growth in statistical terms.

“There are US$282 billlion in assets under management in smart beta – last year saw a 40% increase in the European space, and a 20% increase in the US," he said.

"There is a big trend going on here and it will continue. Regulatory demand for greater active transparency and increasing concerns over manager fees will drive it."                    

However, Clive Hale, managing director of Albermarle Street Partners, attributed smart beta’s ascent to the difficulty investors have finding active managers who can "deliver the goods". Moreover, as a self-professed "lone voice" for active management, he didn't consider smart beta's expansion an entirely positive development.

"Many who are doing smart beta are doing so because they're lazy, and aren't looking hard enough for outperformers. It's true that fund managers have overpaid themselves for too long, but there are areas where factor investing really doesn’t work," he said.

"A lot of smart beta is flavour of the month – people want performance now, not in a few years' time. My concern is their underlying factor events will disappear. Value investing does have a long-term track record, but you do have to wait for it.”

Despite the overwhelming support for smart beta evidenced on the panel, its exponents don't believe its rise spells the end for active managers.

"Different approaches work for different markets and assets. Some areas can be very effectively accessed through smart beta strategies, others either less so or not at all – although smart beta is certainly challenging traditional managers in highly liquid markets," said Chris Brightman, chief investment officer at Research Affiliates.

Corsi concurred smart beta was not a panacea for investors, saying it had to be fully understood and properly utilised. He also suggested smart beta would gain in complexity over time – a forecast Hale expressed concerns over.

“The whole point of smart beta is its simplicity – if it’s complex then the end user is not going to be able to understand it, with all the issues that implies," he said.

"The end user will be disappointed, and so will regulators. The markets need to stay simple – fund selectors need to understand how something works, so they can explain it to clients.”

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