How much of this is client-demand driven and how much comes from the marketing efforts of money managers which have smart beta offerings to sell is open to debate however.
Proponents of smart beta funds, or advanced beta as it is also known, would argue the strategy provides investors with the best of both worlds. That is to say, it offers some of the benefits of active management with costs closer to passive trackers.
According to Ana Paula Harris, portfolio strategist at State Street Global Advisors, smart beta should be regarded as an ‘evolution in indexing’. It retains traditional indexing benefits such as being transparent, objective, low cost, diversified and liquid while offering advantages in terms of returns, flexibility and portfolio construction options. Harris added that it allows investors to incorporate some of their own beliefs into their portfolios, but cautioned that it should be seen as one tool rather than an investment end in itself.
The claim of those who advocate smart beta, such as Harris, is that it means investors no longer face a binary choice between active and passive management. It allows them to overlay allocations with additional types of strategies that combine the benefits of passive investment with a more targeted exposure to certain risks and return drivers.
“Smart beta does have some appeal as it can offer lower fees than active management while still allowing a client’s views to be taken into the investment process,” said Steven Richards, associate director at discretionary fund manager Thesis Asset Management. He added that he has noticed more interest in smart beta among clients and he does expect it to grow in popularity to some extent.
Richards said that while smart beta does have the potential to be the best of both the approach is ‘still in its infancy’ and it is far too early to draw a firm view on whether it can deliver any outperformance on a consistent basis. “The risk is always that investors look too much at historical performance and could come unstuck in that regard,” he cautioned.
Hargreaves Lansdown’s head of research Mark Dampier is decidedly sceptical on smart beta, which he considers totally unproven and lacking in regard to educating investors on the benefits and features of the strategy.
“I think most people still don’t know what smart beta means,” he said. “Perhaps I am a cynic but after 30 years in the industry I have seen reinventions of just about everything so I want to see if it works over time,” he added.
He concurred with Richards’ view that it is too early to draw any conclusions and went a step further. “[Smart beta] is something that has had a lot of noise around it recently but I think we need to see how it performs through a whole business cycle, which is typically at least 7 years,” Dampier said. “You need to see how a strategy works through different stages of a cycle rather just over a couple of years to draw any firm conclusions,” he added.“
Whether the advocates or the cynics will hold more sway with investors over the coming year will be very interesting to watch and at this point in time it is far from clear which side of that coin will land facing up.
