Is Smart Beta Shaking Up Active Management?

Investment managers have remained confident about their ability to capture alpha despite steady inflows to passive strategies, according to Northern Trust.

The firm’s fourth quarter survey showed nearly 70% of managers said they expect little effect of the growth of smart beta strategies on their ability to generate alpha.

Almost all respondents said their active management divisions have been unaffected or modestly affected by the uptick in passive strategies. Only about 4% of managers said they perceived significant damage.

Managers were also confident that the trend towards passive investing and smart beta would continue at a modest pace or decline over the next five years. The survey showed only 9% expected smart beta strategies to take hold of significantly more market share between now and 2020.

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Furthermore, only about 10% of managers believed the bump in asset flows into passive strategies would have “a long-term, systematic impact” on their ability to produce excess returns.

Northern Trust Survey (Source: Northern Trust)

Northern Trust also found managers were generally bullish about the US economy, while 80% said they anticipated increased volatility in the first half of 2015.

“Managers expect volatility to increase due to geopolitical instability, economic slowdowns in Europe and Japan, US equity valuations, and a dramatic drop in oil prices,” Christopher Vella, CIO for the firm’s multi-manager solutions, said.

However, the majority of respondents were positive about US corporate profits, job growth, and housing prices, reflecting positive views for 2015.

Nearly one-fifth of managers believed inflation would decrease over the next six months, largely due to drop in oil prices, the survey revealed.

Despite a volatile predicted market environment, about half of the managers were bullish on US large-cap equities, non-US developed equities, and more than 40% were positive about emerging market equities.

The majority of respondents, however, had negative outlooks for US fixed income and commodities.

NYC’s retirement system has joined a lawsuit against American Realty Capital Partners, claiming it “artificially inflated prices” of its securities.

American Realty Capital Properties (ACRP), a real estate investment trust provider, is facing a growing group of investors claiming it fraudulently inflated performance figures.

The $159 billion New York City retirement system and TIAA-CREF have filed complaints against the firm, requesting to join in an ongoing lawsuit led by two Ohio public pension funds.

“The company concealed the risk that its utter lack of meaningful controls would enable corrupt members of senior management to mislead investors by doctoring ACRP’s financial results.”

In October 2014, nine days after the Ohio pensions first filed suit, the real estate firm admitted it had made intentional accounting errors, and purposely failed to correct other mistaken figures. Its stock plummeted by 30% within hours of the revelation, and closed trading for the day having lost roughly $2 billion in market capitalization.

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TIAA-CREF claimed it alone lost tens of millions of dollars due to the alleged accounting fraud, while the Ohio pensions peg the damage for all American Realty Capital investors in the billions.

“In light of general investor concerns about the quality of the company’s accounting functions, internal controls, and corporate governance (as highlighted by several embarrassing reporting mishaps), ACRP desperately sought to reassure investors that it had righted the ship and that its internal control systems were above reproach,” TIAA-CREF’s complaint stated.

“In doing so,” the filing continued, “the company concealed the risk that its utter lack of meaningful controls would enable corrupt members of senior management to mislead investors by doctoring ACRP’s financial results.”

The group investors suing ACRP has accused the firm and its former executives of a number of securities law violations. These shareholders are seeking compensation for their diminished investments and punitive damages, as well as reimbursement for legal fees.

ACRP had not filed a response to the charges at time of publication.