Consider smart beta pitfalls: Standard Life Investments

Global investment manager, Standard Life Investments, is warning investors to be cautious of smart beta strategies, as they lack clarity in their investment objectives and offer limited sustainability.

Standard Life Investments' new research found that smart beta investing was more complex than investors perceived and required careful consideration, despite some believing they offered benchmark beating returns and lower fees than active management.

"As the active versus passive paradigm shifts, traditional benchmarking will be increasingly superseded by outcome oriented mandates. Transparent algorithmic components, such as smart beta had a role to play but should not be used as a static allocation," the fund manager said.

Standard Life Investments' head of multi-asset quantitative strategies, Arne Staal said investors had to make more complex evaluations and choices, yet factor in a wider range of costs with smart beta strategies.

Standard Life Investments also found that smart beta strategies had a backward looking bias and were inefficient to implement. However, they increased security selection opportunities and were more transparent.

"An awareness of the pitfalls in using transparent algorithmic investment strategies, such as smart beta is increasing, but not yet widely discussed."

"We advise investors to approach smart beta investing with similar levels of due diligence as they would for active managers," Staal said.