Smart beta is not passive warns fund exec
Financial advisers should not consider the current wave of smart beta investments as a form of passive investing with the local debate missing the point about how these investments operate according to a senior funds management executive.
AXA Investment Management, Director of Australia and New Zealand, Craig Hurt said smart beta investments were being labelled as an extension of passive investing but this was not the case with the term at risk of being hijacked.
“It is being seen by some as another form of passive investing because of the use of a ‘rules based system’ but this is not the case. It is more than a reworking of passive strategies that don’t work.”
Smart beta is being more commonly used in the provision of exchange traded funds (ETF) with Hurt stating it sat between active and passive management and should be considered a separate strategy from passive investing.
“There are two conditions necessary for a smart beta strategy and one is that it is actively implemented. The strategy can use rules but it has to be actively applied. The other condition is the fund manager must be on the hook for the outcome. If not then the idea of smart beta has been hijacked to rework a passive index,” Hurt said.
However MSCI Managing Director, Research, Chia Chin Ping regards smart beta as providing active returns via passive factor investing which tracked a common set of factors that shaped what investments were chosen.
Chia said MSCI, which refers to smart beta as ‘factor investing’ and provides the indices for client strategies, saw this development as creating a third space between passive and active management.
“Questions around whether factor investing should be used to replace active or passive is not the right way to consider this,” Chia said stating the returns were systematic and thus unlike either category.
Chia said many investors and advisers were still thinking of this as two markets but a shift had already begun at the institutional level with some funds using smart beta to replace both active and passive components and to gain cheap access to overseas markets.
AUTHOR
Jason Spits
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