Smart beta index-based strategies have gained momentum in the investment world, but active managers have not taken it sitting down. Investors can also gain exposure to a dynamic approach to smart beta through actively managed exchange traded funds that take a different form to more traditional styles.
“While smart beta is often viewed through a passive investment lens and applied to style or factor investing, similar strategies that pre-date global investment consulting firm Towers Watson’s coining of the term ‘smart beta’ were often implemented in an active fashion,” Alex G. Piré, Vice President of Natixis Asset Management U.S. and Head of Client Portfolio Management for Seeyond, said in a research note.
Advancements in technology has helped made smart beta indexing easier and popularized quantitative factor investing by making it more accessible to investors. However, Piré argued that the process of indexation has also led to various risks, which may erode the value investors can obtain from these smart beta strategies.
Piré explained that passive smart beta strategies vary in definition, approach and implementation, which may lead to a wide disparity in resulting portfolios and outcomes. Meanwhile, risk factors may not benefit from the stability of a market capitalization, country, or sector classification, which may result in a need to rebalance when the market oscillate and might not fit well within a bi-annual, turnover-constrained passive framework. Additionally, in order to properly exploit a market premium, the strategy needs to be managed in a manner that does not diminish value.
Alternatively, Piré proposes the idea that actively implemented quantitative strategies that try to overcome the hurdles of passive smart beta may be a better way to provide exposure to market factors.
“Going active with factors can take different forms from a more traditional fundamental strategy to a quantitative approach,” Piré said. “Although each approach has its potential advantages and disadvantages, investors may benefit from the full attention of portfolio managers who are providing consistent monitoring of the portfolio in an attempt to see a strategy take advantage of the given factor/anomaly as effectively as possible.”