Searching for the right kind of beta

By Geoff Candy

Diversification is much easier to achieve in a growth portfolio than in an income portfolio, says Chris Jackson, head of UK retail at Natixis Global Asset Management.

This is one of the findings made by the group’s Portfolio Research and Consulting Group, which sits between its sales force and intermediaries and aims to advise them on portfolio construction.

Given the massive yield compression seen in bond markets over the last few years and the QE-induced highs visible across a variety of stock markets at the moment, such a situation makes sense. With a smaller pool of assets from which to choose, diversification is always likely to be more difficult.

But, it does pose a problem for asset allocators who are trying to fill portfolios with managers that can provide both income and diversity.

It is, thus, also understandable that, as the FT revealed on Sunday, Vanguard: “enjoyed $291bn in new business last year, a fifth of the industry’s net inflows”, making it by far the world’s most popular asset manager.

As the FT points out, this once again highlights the growing popularity of passive
investment funds.
But, it is important to note that passive investment too is changing.

As Jackson explains: “What we initially saw was a massive polarisation between beta and alpha. Now you are seeing beta shifting toward the middle and eventually you will see strategies and propositions and promises that fill the whole of the spectrum.”

Ben Thompson, director of marketing for ETPs, UK at Lyxor agrees, pointing out that, while traditionally ETF investment has been around the core benchmarks, increasingly, index exposures are changing to reflect the increasingly sophisticated nature of the exposure.
“We are seeing growth in single country ETFs; investors are realising that you can still be tactical at an index level,” he said.

On the next rung up the passive ladder, smart beta, significant growth is also being seen.

As TOBAM announced on Monday, it has seen $2.1bn in net inflows into its anti-benchmark strategies in the last three months.

According to the Paris-based asset manager, while US public and corporate pension funds accounted for $ of that number, UK clients accounted for $355m of the total. The group said assets under management have now crossed US$8bn, from $2.79bn at the end of 2012.

Asked his view of the evolution of passive investment and particularly the rise of smart beta, Yves Choueifaty TOBAM president told Portfolio Adviser that the trend toward smart beta began in June 2005; for a while the thinking was hetrodox, he said, but increasingly, sophisticated investors have recognised that, over the medium to long term, passive management doesn’t offer as much value as active management.

But, he added, the terminology remains unclear.

“The term passive management is a complete oxymoron, if you do nothing with the money in your care, you are a custodian, not a manager.

“To my mind, anything but market capitalised index tracking should be considered active management, because it is making an active decision,” he added.
Choueifaty believes that the trend toward use of smart beta strategies will increase.

According to Jackson , the other implication of this smoothing out of the barbell into a much smoother spectrum, is that: “as an industry, there is a much greater gradation of fees.
“You are seeing more and more pricing points between the extremes in the way
propositions are being brought to markets,” he said.

He added: “There has also been an increase in outcome-orientated products, I think product development is becoming a little more discerning in how it defines its outcome and consequently you are getting that gradation of pricing.”
That is not to say, however, that everything comes down to price.

Indeed, Choueifaty, believes that the far from hastening the adoption of smart beta strategies, a focus solely on price has resulted in a slowing of their use, as investors balk at paying for something that is viewed as a passive vehicle.
Which is where, once more, the view of the graded pricing comes in.

For Jackson, the factors above only serve to reinforce his view that over the course of the next few years a focus on “the proper price for a proper promise and delivering on that is the way successful investment houses will emerge.
“And, that is becoming more and more important as more and more intermediaries
embrace portfolio construction against proper, specific financial benchmarking on an individual client-by-client basis