The total risk and return of the portfolio is the sum of these parts — proportions will differ, but our research suggests that on average, most actively managed portfolios have significant exposures to smart beta factors. For example, an average 35% of global equity managers’ active risk is explained by smart beta, like the style factors previously mentioned; for about a third of global equity managers, smart beta contributes 50% or more of their active risk. The phenomena is even more pronounced for fixed income managers, where exposure to interest rate and credit factors account for nearly 70% of the risk in the average core plus fixed income portfolio.
The takeaway? You are probably already a smart beta investor – chances are your actively managed funds include significant exposure to smart beta factors . We think owning smart beta is a good idea, but you may also be paying active-like fees for those exposures. And that’s exactly the a-ha moment – smart beta strategies can efficiently deliver many of the same themes present in actively managed portfolios, with greater transparency and at a fraction of the cost.
Active, index and smart beta
The growing adoption of smart beta products should inspire all investors to examine their current portfolios. We believe investors should seek returns from every potential source – and that all investors should consider the proportion of active, passive and smart beta investments that can help meet your own investment goals.
In my next post, we’ll look forward to 2015 and how we expect smart beta to shape investment results in the coming year.
Sara Shores, Global Head of Smart Beta for BlackRock, is the newest contributor to The Blog.