Smart Beta, a more refined index-style investment strategy, is becoming more popular to some investors because of low interest or market returns. It allows investors to gain from alleged systemic anomalies, such as the super efficiency and low volatile stocks.
The approach uses sales, earnings, book value, cash flow or dividends in the form of alternatively weighted indices instead of market capitalization.
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Some people in the industry are speculating that pension funds may be attracted to use smart beta as a new technique in investing to boost their returns as equity markets continue to rise while staying away from asset classes that are costly and volatile.
Pension funds are looking for alternative investments to boost returns. Some people in the industry suggests that real estate, private equity, and hedge funds are obviously good alternative investments for pension funds because of the fact that they are suffering from bond-heavy portfolios with weak or negative returns.
The global pension fund industry is worth approximately $35 trillion. The funds had avoided investing in high equity volatility since 2000 particularly in western countries because many of their members are retiring over the next decade. In addition, pension funds are also avoiding high transaction fees related to investments as they frequently buy and sell stocks. These factors are driving pension funds to look for alternative investing strategy that costs less and simple.
According to Reuters, data from Towers Watson, showed that at least $20 billion pension fund assets were already invested using smart beta strategies including Danish fund PKA, the Dutch PNO Media fund, and Wiltshire County Council fund in Britain.
A survey from Consultancy bfinance revealed that 43 percent of pension funds representing $350 billion assets are considering a move from their traditional passive investments to smart beta.
Olivier Cassin, managing director of bfinance said, “There’s general dissatisfaction with some active strategies. They’re expensive and some have proven in this choppy market very volatile. People typically want lower volatility to minimise capital loss.”
Cassin added, “”They also want to do it in a cheaper manner than via an active strategy. There’s a willingness to reduce overall fees … When portfolios are in negative territory, fees are becoming even more important. It changes the way equity portfolios are invested.”
A report from Pensions & Investments said that the California Public Employees’ Retirement System (CalPERS), which managers more than $250 billion assets is planning to switch all of its portfolio to passive strategies.
Tony Morris, global head of quantitative strategies in fixed income at Nomura said, “(Smart beta) is empowering people to cut the middleman. You can create your own hedge funds. It’s allowing people achieve their own salvation with their own toolkit.” The firm estimated that the assets of ETFs associated with smart beta increased by 166 percent to $160 billion since 2008.
Nomura estimates assets of ETFs associated with smart beta have grown to $160 billion, up 166 percent since 2008.