Institutional investors are expanding into smart beta strategies with many Increasingly looking at a “blended” approach or combining a variety of factors to deliver optimum returns, according to experts on a webinar hosted by AsianInvestor in partnership with FTSE Russell.
Smart-beta or factor-based strategies are implemented like a typical index strategy with investing rules that are fixed and transparent. It is a way of creating portfolios where individual stock position weights are determined using measurements other than market capitalisation. These measurements could be based on single factors such as valuation, risk or momentum, or a combination of factors.
Based on the recent webinar, moderated by AsianInvestor editor Richard Morrow, experts from Blackrock, Willis Towers Watson, State Street Global Investors and FTSE Russell shared their views of how factor-based indices have evolved and how they have developed in Asia versus those in other regions.
The experts agreed that the investment style has gained traction in Asia, with more mature markets seen in Australia and Japan, and interest developing in Hong Kong, Singapore and the rest of Asia.
In place of single-factor strategies, most asset owners are increasingly combining multiple factors to better fit their perspectives of capital market performance versus their portfolio needs.
“Investors are looking for uncorrelated sources of additional return in their portfolio and that either comes from alpha, alternatives or in this case adding some factor exposure to the portfolio,” said Ben Garland, director and senior investment strategist for a factor based investing unit at BlackRock.
“The idea of adding factors to give the sort of insights used by an active manager but in a more transparent liquid manner is ticking boxes for institutions, and also mums and dads,” he added.
“Up to 10 years ago it was value and value strategies, then, coming out of the financial crisis [of 2008] there was a lot of interest in low volatility structures that was part of the education process for investors in the Asia region,” said Garland. “We are starting to see interest in blended strategies, which reflects the fact the broader market is realising that timing [the market] is difficult.”
Single-factor strategies have proven to deliver positive returns in the long run, however, they have been shown to suffer periods of underperformance in the short-term due to their cyclicality.
“You need to invest for five to 10 years to benefit from a lot of these single factors,” said Jonathan Shead, head of portfolio strategy for Asia Pacific, at State Street Global Advisors.
Based on a live poll run by AsianInvestor during the webinar, up to 70% of respondents intend to increase their allocations to multi-factor strategies in the coming 12 months. Among them, 20 percent says they will increase their allocation by at least 5%.
Christopher Vass, senior product manager at FTSE Russell sees a similar trend.
“The single factor or smart beta strategy that has been continuously popular has been yield or income, but what has changed is that we have seen more clients requesting to add other factors like quality, to reduce volatility or risk,” he said.
For some investors, smart-beta investing combines the best attribute of active and passive investing.
“Many of these factor-blended strategies are being used to replace active equity. Many of our clients have become disillusioned with active equity management,” said Paul Colwell, chairman of the portfolio advisory group at Willis Towers Watson. “From the passive end of the spectrum, some clients are just looking for return enhancement in a way that is systematic and in a form with which they are quite familiar through passive investing,” he added.
Although interest in such strategies has focused largely on equities to date, the fund managers also indicated their interest to adopt factor-based investing in other asset classes such as multi-assets and fixed income.
I think more strategies will be developed on local equity markets and I think we will see more uptick in fixed income smart beta as well,” said Vass. However, Shead at State Street Global Advisors noted that the development of these strategies will be slow.
“In terms of academic research and broad consensus of what constitutes value and momentum and so on; we do not have that broad consensus in other asset classes other than equities. Where we don’t have that broad base of academic consensus, we think development [of new factor-based products] will be a little bit slower,” he said.
Full coverage of webinar is published in AsianInvestor's December/January magazine. To listen to the on-demand playback, click here.