Smart Beta Investing - Trends and Opportunities
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Transcript of Smart Beta Investing - Trends and Opportunities
SMART BETA INVESTING A fad or a trend? Thursday, 4 February 2016 | Grand Hya7 New York Amit Sinha
All views expressed in this presentation are that of the presenter and do not necessarily reflect the views of his employer or any of its affiliates.
Disclaimer
n Defining Smart Beta
n Advances in data and computing have fueled its growth
what
why do we care? where is the industry headed?
n Helps investors construct better portfolios
n At lower cost
n But can it persist?
n At the crossroads of key industry trends
n $12T opportunity, but at what price?
n Business models are rapidly evolving
Agenda
What is Smart Beta?
n Smart Beta ETF assets have tripled globally since 2010
n In 2015, Smart Beta ETF launches (492) surpassed Non-Smart Beta ETF launches (192)
Year 2010 2011 2012 2013 2014 2015
# of Global Non-Smart Beta ETF launches 556 403 347 336 309 192
# of Global Smart Beta ETF launches 90 215 179 113 307 492
Source: Morningstar
90
215 179 113
307
492 556
403 347 336 309
192
0
200
400
600
800
1000
0
500
1,000
1,500
2,000
2,500
2010 2011 2012 2013 2014 2015
# of launches Net
Ass
ets
($ b
n)
# of Global Smart Beta launches # of Global Non-Smart Beta launches
Global Smart Beta Net Assets ($ bn) Global Non-Smart Beta Net Assets ($ bn)
Growth of global Smart Beta ETFs
“Today’s biggest trend is not smart beta, it’s wishing we had a better
name for it than smart beta” Jim King, Managing Director, ETF portfolio management, Guggenheim Investments
Smart Beta also known as
Alternative Beta
Strategic Beta
Advanced Beta
Systematic Beta
Enhanced Beta
A systematic approach to earn risk premia that exist in markets due to structural or behavioral factors
Structural or behavioral basis for results
Portfolios that produce superior results vs. total market and pure index funds
Persistent over long periods of time and across regimes
Not driven by discretionary human decisions
1969 – 1971 Wells Fargo developed, and then abandoned an equally weighted index
1977 The original Vanguard S&P 500 index fund could only trade about 200 stocks
2000 – 2014 15x growth in the number of Smart Beta funds
INDEX INVESTING
INDEX MUTUAL FUND
SMART BETA
500+
Advances in data and computing have fueled the exponential growth of Smart Beta
why do we care?
Smart Beta helps investors construct better portfolios
63%
62%
43%
29%
15%
3%
0% 10% 20% 30% 40% 50% 60% 70%
Risk reduction
Return enhancement
Improve diversification
Provide specific factor exposure
Cost savings
Other
Source: Russell Indexes Global Smart Beta Survey 2014
What investment objective initiated the evaluation of Smart Beta strategies?
Equity Fixed Income Alternatives
– Manager selection
– Alpha/Beta
Exposures Risk
Exposure-driven portfolio construction
Risk premia Economic Liquidity Default
Strategy
Value Momentum Carry
Volatility Curve Fundamentals
ERP Duration etc.
etc…
Construction Risk Return Diversity
etc.
Equity Fixed Income Alts Observe
Traditional portfolio
Smart Beta is not a fund or a strategy – it makes an investor think about the exposures that drive risk and return in a portfolio
Superior risk-adjusted returns persist from structural or behavioral factors
Systematic approaches can deliver these exposures at lower cost, across asset classes
This is because…
MSCI single factor indices vs. MSCI World Index performance since 2000
Source: MSCI and Bloomberg as of 6/30/2015 The index values are rebased to 100 on 1/3/2000
0
100
200
300
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Jan-
14
Jan-
15
The MSCI World Index MSCI World Value Index MSCI World Momentum (Net USD) Index MSCI World Minimum Volatility (USD) Index MSCI World Mid Cap Equal Weighted (Net USD) Index
Superior risk-adjusted returns persist from structural or behavioral factors
Source: Towers Watson
Risk and return characteristics of a range of Smart Beta strategies from February 2002 to December 2012
Systematic approaches can deliver these exposures at lower cost, across asset classes
10 – 25 bps
50 – 75 bps
Traditional Equity Factors
Alternatives, Dynamic, etc.
Source: Blackrock, GSAM, Industry reports
But how can it work if everyone knows about it?
“if something is rational compensation for risk, then there is no reason it should
ever completely disappear or necessarily fall below a
rational level.”
Factors such as low vol, value, momentum have been actively traded since the 1980s, and continue to persist
According to State Street:
“just because they are now known doesn’t mean
everyone believes in them or is comfortable with them!”
Cliff Asness, AQR How Can a Strategy Still Work If Everyone Knows About It?
53 % OF INDIVIDUAL INVESTORS BELIEVE ALPHA IS DRIVEN BY SKILL
42 % OF INVESTMENT PROFESSIONALS BELIEVE SKILL IS THE PRIMARY DRIVER OF OUTPERFORMANCE
+ organizational decision processes, constraints = persistence
where is the industry headed?
Investor appetite for index/ETFs
Broad adoption of alternatives
Unconstrained fixed income
Shift to outcomes and solutions
Focus on income
Longevity and retirement
Evolution of emerging markets
Source: Trends from Blackrock Investor day 2014
Smart Beta is at the crossroads of key industry trends
$225T total assets
$65T investible
$1T smart beta
$12T
Sources: Estimates based on analysis of data from Blackrock, Russell, Morningstar, Towers Watson
The potential for growth is there
$28T US assets
6.3
0.8
5.7 1.9 7.3
5.7
2.0
0.0 5.0 10.0 15.0 20.0 25.0
DB Pension
Target Date Funds
Other DC
Annuities
IRAs
Other
19.0 17.0
24.0
6.5
0.0 10.0 20.0 30.0 40.0
Retirement
Insurance
High Net Worth
$65T Global assets
Sources: PWC, Morningstar, ICI, NAIC, Towers Watson, P&I, Knight Frank, Blackrock
Retirement solutions represent the largest opportunity
bps x AUM
Despite complexity, the economics of our business is simple
With bps cratering, most players will be relying on AUM growth…
1 T
3 T
9 T
0.50% 0.17% 0.06% Fees
Assets
Current revenue estimated at $5B
…in an increasingly challenging environment
Product
Operations
Distribution
n Equity indices getting commoditized
n Regulation, compliance, execution
n Differentiation? n Higher marketing costs
n As a niche player n As a large traditional manager n As a hedge fund
Acquire/Sub Advise
Outsource/ Consolidate Solutions
Derivatives Niche products Brand
How do we deal with it? Challenges
n Dimensional: probably the oldest and largest provider – moving into solutions, ETFs
n AQR: strategy shift in 2009: $100B+ manager, thought leadership, data
n GSAM: acquired product (westpeak), 9bps
n Hedge Fund A: providing Smart Beta to TDF providers, ~ 30% of their assets
n Mutual Fund B: insurance-linked securities
n Index: RAFI – content and education
A few different approaches
n Smart Beta helps investors build better portfolios that meet their needs, using systematic strategies, at lower cost
n Structural and behavioral biases will likely cause factor premia to persist
n It’s a $12T opportunity, but in a good product alone is not enough to succeed
In Conclusion
n Will large players dominate based on distribution and pricing?
n How can a fund differentiate itself?
n How to gain traction in the absence of a track record?
n Does format (i.e. mutual fund, ETF, managed account, indexed) matter?
What do you think?
Amit Sinha Portfolio Manager
Pacific Private Fund Advisors LLC
www.linkedin.com/in/amitsinha1978
Thank you