PLSA Investment Conference 2017: While smart beta has been labelled a cost-effective option for schemes looking for higher returns than a market cap index, trustees turning to these types of strategy have been advised to keep things simple while focusing on governance and costs.
Speaking at the Pensions and Lifetime Savings Association Investment Conference 2017, Rachel Lord, Emea head of iShares and index investments at BlackRock, said regulation was making investment more expensive while markets were giving less return.
“That has caused people to look at other ways of delivering better returns, better outcomes over time. That has been one of the drivers of the evolution of beta,” she said. This was followed up by Manuela Sperandeo, Emea head of specialist sales for iShares and index investments at the asset manager, who said this “new evolution of beta” could lead to better outcomes.
Look to put in place an approach that will stand the test of time. Avoid the latest great idea
John Stannard, Capital Cranfield
In terms of risk reduction, “it’s important to have access to strategies that keep you invested in the equity market, but at a lower risk”, she said. “Investing is harder than ever” given the current economic environment, so “we need to rethink our allocation to indices and we need to rethink ways indices are built”, Sperandeo argued.
Keep members in mind
John Stannard, client director at professional trustee company Capital Cranfield, agreed that due to the challenging low-yield environment many DB trustees are looking at solutions such as specialist bonds, multi-asset strategies and factor-based indices.
Stannard pointed out the differences between defined contribution and defined benefit, saying about DC: “First of all, the member is taking the investment risk [and] trustees are required to assess member value – there are very specific rules around that.”
When pursuing strategies like smart beta, trustees have to think about whether it “creates constraints on the trustees’ ability to manage the scheme [and] provide governance”, he said.
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“If we are going to add sophistication to the strategy, we need to do so in a way that members can understand and can engage with,” he stressed.
Member outcomes and value for money were important, he said, but most of all, trustees needed to make sure they could communicate this to members. Many mastertrusts are now moving away from a simple passive growth strategy and incorporating a range of strategies including factor-based beta, Stannard noted.
He also advised that schemes should look to put in place an approach that will stand the test of time. “Avoid the latest great idea,” he said.
In terms of governance, “it needs to be manageable, it needs to be practical”, according to Stannard, who said trustees should avoid something that needs constant management or requires members to take decisions.
He added: “Keep it simple, don’t be too sophisticated and delegate day-to-day decisions.”
