Given the current context, yield-starved institutional investors are turning towards riskier assets while still seeking to limit potential drawdown. By definition such asset classes tend to be more volatile and more risky than bonds. Smart Beta, however, could provide an appropriate solution for investors juggling these different constraints
A Smart Beta approach makes it possible to increase diversification and to improve risk management, whilst seeking to capture new sources of performance. Today, it is divided into two major families. The first is made up of approaches that focus on the efficient management of risk. These include diversification strategies and “minimum variance” strategies, which aim to construct portfolios with the lowest possible levels of risk and volatility. Though these solutions have existed for more than 10 years, they really took off after the 2008 crisis.
The second and more recent family is made up of factor-based investment strategies, which involve structuring a portfolio in order to take advantage of the risk premiums on one or several style factors. Academic research backed-up by investment results suggests that there are five main factors: Value, Momentum, Size, Quality and Low Volatility. Each of these factors can be implemented alone or as part of a multi-factor strategy. Factors can be combined in a way that is highly systematic, passive (for example equally weighted) or active.
These approaches are currently hugely popular with institutional investors. Initially used as a satellite to complement more traditional strategies, they have enjoyed a reverse trend over recent years. More and more investors are choosing to consider them as core to the portfolio, and to complement them with riskier satellite strategies in order to capture a potential short-term performance. This attractiveness is compounded by the fact that Smart Beta solutions can be easily customised to take into account the specific requirements of each investor. Of course, this shift relies on asset managers having the necessary skills and size for core portfolio management; and thus are able to manage large volumes without compromising risk control or performance.
3 Questions for Bruno Taillardat, Global Head of Smart Beta & Factor Investing at Amundi
Can you tell us about Smart Beta at Amundi?
We manage over €12bn (Source: Amundi, as of 31/03/2017) in Smart Beta, covering both solutions based on efficient risk management and on factor investing. These solutions are divided into passive (index-based or ETF) and active management. Our Smart Beta teams also leverage Amundi’s other resources, such as our extensive quantitative research and ESG capabilities. This allows us to build customised products for our clients, one of Amundi’s key strengths.
Could you give an example of a customised approach?
Amundi seeks to be a partner to our investors. We like to be involved in the development process quite early on in order to be able to provide solutions and advice best suited to an investor’s particular needs and constraints. For example, we can carry out a factor analysis of a portfolio so as to identify if there is a bias towards one of the factors and then possibly suggest diversification. We have also developed a number of solutions that combine our Smart Beta approach with ESG analysis or portfolio decarbonisation.
Do you also offer solutions which take into account regulatory constraints?
Institutional investors tend to express a keen interest in solutions that help lowering the cost of capital. This can be done by using option strategies or by offering a capital guarantee, an area in which Amundi has great expertise. Smart Beta solutions are well suited to this because they make it possible, by construction, to absorb market downturns and thus to reduce hedging costs.
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This document is not intended as an offer or solicitation. All views expressed cannot be construed as a recommendation by Amundi.