Investment data reveal the amount of money invested in smart beta strategies across Europe has grown strongly over the past decade, but a recent report has raised concerns the strategies' benefits could be overstated.
'Smart beta' products allow investors to passively access alternative indices to the traditional market capitalisation-weighted approach.
European investment in smart beta strategies reached €72.7bn (£54.9bn) in 2014, up from €52.3bn the previous year and €1.82bn in 2004, according to analysis carried out by research company Morningstar alongside investment manager State Street Global Advisors.
Ana Paula Harris, portfolio strategist at State Street, said: “We see a lot of interest from a variety of clients… Before, you might have been paying managers to capture views like value or small cap.”
Harris added smart beta strategies typically rebalance frequently, which is not always the case in active management.
We believe smart beta as an offering does serve a purpose in the investment market, but that its proponents' claims often overstate what it can actually deliver
KPMG
But despite the growing popularity, consultancy KPMG released a report entitled 'Smart beta: Why we won’t be rushing in'.
In the report KPMG states: “We believe smart beta as an offering does serve a purpose in the investment market, but that its proponents' claims often overstate what it can actually deliver.”
The report outlines “particular reservations” over claims smart beta can offer consistent outperformance of passive strategies or better risk-adjusted returns over active. But it could still be useful to pick out a specific investment theme, said Simeon Willis, principal consultant at KPMG.
“If, for instance, you liked value investing and thought those stocks were generally better, you could use smart beta to implement that without the cost of an active manager,” he said.
Tim Giles, partner at consultancy Aon Hewitt, said: “If you look at the data, smart beta approaches in the US in equities have provided either greater return or less risk.”
However, he added: “You shouldn’t be thinking that this index will definitely perform one way or another. You should be thinking, ‘What do I believe? And does this index match my philosophy?”
The State Street research also shows the vast majority of smart beta strategies are in equities, with €61.8bn of the €72.7bn total investment in 2014 going into the asset class.
Giles said: “There is a strong economic argument, for example with fundamentally weighted indices, the rebalancing effect can improve returns.”
He added: “We are seeing some take-up. Usually where it's replacing traditional market cap-weighted indices.”
Willis said high-quality active managers were crucial for driving performance in the wider market, but warned public equity was a closed system with equal chances of over or underperforming the market.
“If you didn’t have good-quality, intelligent active managers, you’d have really bad investment decisions being made,” he said.
“People making good decisions about where to put money across the market has a positive effect. Passive managers can have a free ride on that by following the market.”
