Advisers Unfamiliar With Smart Beta
Cerulli has published its March issue of “The Cerulli Edge—U.S. Asset and Wealth Management Edition,” which, among other topics, explores the benefits and drawbacks associated with strategic beta investing.
At the core, strategic beta or “smart beta” strategies aim to achieve enhanced, risk-adjusted returns by tracking an index based on specific rules or preferences. As opposed to conventional market-cap-weighted passive allocations, these funds weigh securities based on specific factors such as performance, dividends, value, volatility and more. In this sense, smart beta seeks to outperform passive indices by taking a more nuanced, active investing approach.
Cerulli says strategic beta products offer advisers the opportunity to fine-tune investment exposures.
“However, they require increasing intellectual capital to select amid an abundance of options,” says Daniil Shapiro, associate director at Cerulli. “A key challenge for strategic beta strategies is the difficulty that advisers face in interpreting them.”
Cerulli’s report makes the case that the increased expertise needed to understand smart beta products, and the pivotal discrepancies in how they are positioned, hinder product use.
“Cerulli’s adviser survey indicates that only 21% of advisers report using strategic beta products—a smaller portion than would be expected, given the wide availability and product development focus,” Shapiro says. “It’s likely that the ambiguity about factors and what they are intended to accomplish is challenging strategic beta adoption.”
About a year ago, FTSE Russell found in its own survey that advisers were only beginning to embrace smart beta strategies. At that point, 47% of advisers in the U.S. said they knew too little about the tactic to see it as a viable opportunity. While 79% of U.S. advisers said they were aware of smart beta, just 36% said they were very familiar with it.
Cerulli’s new reporting suggests that the same fundamental challenges to smart beta adoption remain firmly entrenched.
“In examining how issuers position strategic beta exchange-traded funds [ETFs], Cerulli finds that 68% of issuers often present the products as providing specific factor exposures, while 50% state that they position the ETFs as generating alpha,” Shapiro says. “Advisers, meanwhile, report using strategic beta products based on their desire for key outcomes, particularly downside risk protection and reducing portfolio volatility.”
Additional context for the new Cerulli report was provided by Mike Hunstad, head of quantitative strategies for Northern Trust Asset Management.
According to Hunstad, many types of institutional investors, including defined contribution (DC) and defined benefit (DB) retirement plans, first started to embrace factor-focused portfolios and smart-beta strategies as a means of achieving excess returns. With the latest bouts of market volatility, there has been something of a rush into the low-volatility factor, but other factors are also receiving increased client attention. Many institutions have found real success with factor investing and smart beta, Hunstad suggests.