One in three schemes to up smart beta in low-vol drive

These strategies have become popular with those investors that have questioned the performance of market capitalisation-based indices – but are typically more expensive than traditional passive trackers.  

The survey by consultancy bfinance found 59 per cent of schemes plan to be exposed to alternative indices in a year's time, compared with 47 per cent of schemes that are currently invested.

One in four respondents (26 per cent) had increased exposure to smart beta strategies in the past year and 35 per cent were planning to increase allocation over the next 12 months.

The consultancy surveyed schemes from across the globe, the majority of which (37 per cent) were from the UK and Ireland.

Some schemes have looked at smart beta as the next step in a very passive portfolio – to arrange equity portfolios in a slightly more intelligent way – while others have looked at it as a middle ground between passive and active management. 

Phil Tindall, senior investment consultant at Towers Watson, said there has been a lot of interest in these strategies in the UK as trustees become more familiar with the idea.

The consultancy has seen strong interest in low-volatility and fundamental-weighted strategies. “Our clients have found the fundamental-weighted quite simple – it is clear what you are doing – whereas risk-weighted tend to be more optimisation-based and more difficult for clients to get their heads around,” said Tindall.

But investment may slow down as equity markets continue to perform well in conditions under which low-volatility portfolios may suffer. “But clients should be thinking about this on a long-term basis, not thinking what will happen over the next couple of years,” said Tindall.  

An extended strong equity market rally could appear to make the need to address the risks being taken in a scheme less pressing, said Dan Mikulskis, co-head of ALM at consultancy Redington.

"But a continued compression in credit spreads forces schemes to look hard for new ideas regarding diversified return streams in order to meet their flight plan required return. We believe that those new strategies with a really solid grounding both in theory and market evidence will continue to generate interest in the coming years," he said. 

Initially schemes looked at smart beta as a reweighting away from market-capitalisation indices which have been perceived as less efficient.

Tindall said: “More recently, some thinking is coming around to almost [questioning whether] some of these strategies are capturing some of the things active managers do, such as a value premium or a small cap.”

Schemes could look upon smart beta as a middle way between a passive and active equity allocation.

Chris Jones, head of public markets and alternatives at bfinance, said: “Smart beta is interesting not only as an investment but also as a way of evaluating the performance of active managers.

"It is conceivable that a manager looks to have outperformed a cap-weighted benchmark but all they have done is put a tilt on their portfolio and [are] actually delivering smart beta at active prices.”