Smart Beta strategies perform well in 2013.

The value of “smart beta” strategies in investment portfolios has been highlighted, with performance figures for 2013 showing a smart beta index beat out both Australia’s main market-cap weighted index, and many active fund managers, on a total return basis.

In what was a standout year for active funds, the median manager returned 23.2% over the 2013 calendar year, according to Mercer’s Investment Performance Survey, compared to the 20.2% return achieved by the main benchmark index, the S&P/ASX 200.

Eclipsing both was the FTSE RAFI Australia 200 Index, which returned 25.5% over the calendar year 2013. This performance is supportive of the longer-term performance of this index, which has outperformed the S&P/ASX 200 in 15 out of the last 20 years[1].

The Index is a “Fundamental Index” which is designed to provide investors with exposure to the top 200 companies listed on the ASX, weighted in a way that is reflective of their economic footprint rather than simply their market capitalisation.

The Index has been built using the RAFI® Fundamental Index® methodology, which aims to produce superior long term performance compared to traditional market cap weighted indices. It seeks to do this by improving on some of the limitations of market capitalisation based methodologies, while still maintaining the benefits of passive investment (lower turnover costs, broad economic representation and a transparent, rules-based process).

Rather than simply using market capitalisation of companies in order to weight constituents, which may often result in investors being overweight relatively expensive stocks and underweight relatively inexpensive stocks, the RAFI® Fundamental Index® approach uses four fundamental measures of company size to determine index weights. These four factors are cash dividends, sales, cash flow and book value.

Commenting on the performance of the FTSE RAFI Australia 200 Index, Alex Vynokur, Managing Director of BetaShares, said the RAFI® smart beta strategies have a compelling track record, having shown outperformance versus equivalent market capitalisation indices as well as a large proportion of active fund managers, in many developed and emerging markets, over a number of years.

“We were encouraged to see that even with strong performance of many active fund managers compared to the S&P/ASX 200, the RAFI® methodology outperformed both the S&P/ASX 200 and many active managers during 2013, and is available to all investors at a fraction of the fees charged by most active funds,” Mr Vynokur said.

“Smart beta strategies such as the FTSE RAFI Australia 200 are becoming more mainstream, with BetaShares launching our first exchange traded product of this class during 2013. According to the recent Towers Watson data, institutional investors made over twice as many new investments in smart beta strategies during 2013 compared to the year before, with a total of over $32 billion invested in smart beta strategies globally. We expect Australian investors and their advisers will continue to adopt smart beta due to its intelligent approach, performance potential compared to traditional indices and relatively low costs compared to active managers,” he said.

BetaShares launched the BetaShares FTSE RAFI Australia 200 ETF trading under the ASX code “QOZ” on 11 July 2013.

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Smart Beta strategies on the rise.

New forms of indexation, referred to as “Smart Beta” strategies, will generate strong investor interest according to Zenith Investment Partners ‘Exchange Traded Products Sector Report’ released today.

Dugald Higgins, Senior Investment Analyst with Zenith, says that “Investments utilising Smart Beta strategies have gained traction, mainly in the US, but are relatively new in Australia, particularly under the Exchange Traded Products (ETP) structure, and are likely to grow here as well.

The report is Zenith’s inaugural sector review of ETPs and spans ASX listed Exchange Traded Funds (ETFs), Managed Funds (MFs) and Structured Products (SP). Although Zenith has covered a variety of ETPs for several years, 2013 marks the first year it has elected to release a Sector Report, driven by its expanding coverage and the increasing maturity and scope of the sector.

Higgins goes on to say that “when applied in conjunction with the cost and accessibility benefits of an ETP structure, Smart Beta strategies can provide investors with a cost efficient, and easily accessible way of achieving particular outcomes”.

The report highlights that the majority of Smart Beta strategies currently available to Australian investors revolve around Australian equities with a high dividend focus. However, investment options that increasingly blur the lines between the traditional “passive” nature of ETPs and full active management are beginning to emerge.

“Such investment options can potentially be a source of value add to cost-sensitive investors who wish to maintain an exposure to active management” said Higgins. “This is a space Zenith intends to monitor closely as we expect it to continue to develop”.

From an initial investment universe of 86 Exchange Traded Products, 26 received a positive rating, with 2 ETPs achieving a HIGHLY RECOMMENDED rating, 18 received a RECOMMENDED rating and 6 were assigned an APPROVED rating.

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AXA IM defines Smart Beta as offering long-term investors a more efficient way of capturing market beta while avoiding the limitations of both market cap weighted indices and alternative weighting schemes – such as exposure to undercompensated risk, poor diversification and transaction cost leakage.

In March, AXA IM surveyed 90 Australian institutional investors, including leading super funds and consultants, at a series of educational Smart Beta roundtable events in Brisbane, Melbourne and Sydney. 

According to the survey, one third (33%) of investors and consultants currently allocate money to Smart Beta equity strategies and 17% in Smart Beta bonds strategies. AXA IM’s London-based Head of Institutional Client Strategy, Tim Gardener, said while investors were clearly showing initial interest in the Smart Beta concept, allocations were likely to increase as global investors became more aware of the shortcomings of traditional indices. 

“For years prior to the global financial crisis, investors were generally comfortable tracking indices, despite their flaws and no real long-term harm was caused. The decade facing us will be a period of change and uncertainty, and in our view, there are real dangers in blindly tracking indices based on the past. At AXA IM, we decided the smarter way to harvest beta was not to design a clever index and track it, but rather to develop a series of sensible, transparent, pragmatic and low cost strategies that address the limitations of both market cap indices and alternative indices,” Mr Gardener said.

Demand for Smart Beta solutions to grow in lead up to MySuper
AXA IM’s Director of Australia & New Zealand, Craig Hurt, said he anticipates increased interest around Smart Beta solutions in the Australian market as the MySuper deadline draws closer.

“As of 1 July 2013, Australian super funds will be required to offer a low cost transparent default balanced fund option via a MySuper product. Investors are now facing a new period where return expectations are much lower than we have seen in the past, so there is increasing pressure on fees and hence a strong move to passive investing. Our concern is that in time, this shift will see investors potentially exposed to market bubbles,” Mr Hurt said. 

In response, AXA IM recently launched its SmartBeta global equity strategy with $325m in assets. In designing the strategy, AXA IM leveraged its AXA Rosenberg team’s expertise in engineering and managing quant equity strategies.

The AXA IM credit strategy launched in 2012 and has already attracted over $1bn in assets from leading global pension plans. Now, Australian investors can also access the SmartBeta Bond Strategies via the newly launched AXA World Fund Global SmartBeta Credit Bonds.

“We’re already seeing significant interest from investors globally and locally, and expect to see increased demand ahead of the MySuper deadline,” Mr Hurt concluded.

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