Amid an industry-wide focus on low-cost solutions, two-thirds of private banks in Asia say they will either add or consider adding smart beta products to their clients’ discretionary portfolios in the next 12 months, according to a recent APB Mandate survey.
Nearly half (47%) of private banking respondents say they have already explored the possibility of using smart beta solutions, which are passive instruments built using alternative index construction rules. One in five (20%) respondents say they will implement smart beta solutions in the coming 12 months, while another 47% are undecided.
While many private banks are still in the process of evaluating the merits of smart beta products, institutional investors are already rapidly adding exposure to these strategies. According to a recent FTSE Russell report, smart beta ETFs were worth more than US$530 billion at the end of January. Nearly two-thirds (64%) of those who invest in smart beta have adopted multi-factor strategies.
“That is more than triple the rate in the 2015 survey,” says FTSE Russell, adding that the question was not even asked in the 2014 survey. “Furthermore, 71% of those who have implemented a smart beta strategy for the first time within the last two years are using a multi-factor combination.”
Substituting underperforming, unproven, opaque alternatives
Tom Naaijkens, client portfolio manager for quant equities at Robeco, says smart beta strategies are a blend between ‘active’ decisions and ‘passive’ products.
“In terms of TER (total expense ratios) we see factor investing being positioned between passive and active investing,” says Naaijkens.
“We consider that a very competitive positioning as the expected alpha from the factors can be made very explicit, for example, by looking at the information ratio or the Sharpe ratio. The alpha from hedge funds or liquid alternatives is often not fully transparent and so may be the risks involved.
“Hence we see appetite for our factor-based solutions, and all alternatives that struggle to provide transparency or proof of their added value are likely candidates for replacement.”
Naaijkens adds that the momentum factor has been performing strongly amid risk-on sentiment, outdoing the low-risk factor, which has proved itself a valuable tool for downside protection – the 2008 financial crisis being a case in point.