Part of the problem, as Research Affiliates noted in a recent paper, is “smart beta now seems to encompass any quant-like strategy that claims some degree of transparency.”
Many smart beta products employ a simplistic factor-tilt strategy, based around themes like low volatility, value, quality, etc.
But, factor-tilt strategies are not the optimal way to capture these premiums over the long term, particularly when taking transaction costs into account, argued the authors of the Research Affiliates paper.
So, what should active managers do? Avoid getting into smart beta completely?
Instead of churning out ‘dumb’ smart beta commodities, managers might consider separately pricing different types of returns, offered Alliance Bernstein.
Returns that are simply reproducing market beta or factor beta should have lower fees, given that they are easier to achieve at a lower cost.
Conversely, smart beta products that produce idiosyncratic returns because of alpha-related components (i.e. are not simply index-huggers), should fetch a slightly higher price.
“This is not just about what makes commercial sense for asset managers, it also would be better aligned to an efficient fee allocation on the part of asset owners,” said the fund group.
“For the asset managers, it would be preferable either to simply lowering fees or else offering ‘smarter smart beta’ which amounts to the same thing.”
Or, if the industry insists on using an AUM-based fee and stock price model, it would make sense to confine this fee structure to an area of the market where there is no clear passive alternative, like multi-asset investing, AB suggested.
