Asset AllocationFebruary 10, 2016

Why Volatility Is Good for (Selling) Smart Beta

Factor investing will only get bigger in the next couple of years, a survey suggests.

Reported by Featured Author

Investor uncertainty will drive greater interest in “multi-factor” smart beta strategies, according to research by Cerulli Associates.

Buyers will focus more on diversification across factors rather than backing individual smart beta styles, the research firm said. The findings came from a survey of asset managers conducted in the middle of last year.

Half of UK asset managers and almost a third (30%) of Nordic managers told the pollsters they expected smart beta products with multiple factor exposures to be among the best-selling strategies in the next one or two years.

“Investors sitting in more cap-weighted passive implementations or classic active management strategies will be looking at the multi-factor smart beta strategies as suitable alternatives because they are cost effective, transparent, and are more likely to live up to potential,” said Justina Deveikyte, senior analyst at Cerulli.

Money dedicated to smart beta portfolios in Europe grew from €9.5 billion ($10.7 billion) in 2011 to €32 billion at the end of 2015, Cerulli’s research showed. Deveikyte added that smart beta’s total assets were expected to grow more still in Europe, the US, and Asia this year as investors continued to take interest.

“For delivering alpha, multi-factor strategies that tiptoe the line of active investing will gain favor,” added Barbara Wall, Europe managing director at the research firm.

Last month, John Chilman—chair of the UK’s Railways Pension Scheme—warned the rise of smart beta products presented a significant challenge to the traditional manager selection role of investment consultants.

“Smart beta is a more passive style and structure, and as such it is likely to reduce the amount of future searches that will happen,” Chilman said.