Traditional Active Managers Fear Smart Beta Adoption

Institute Fund Summit Europe 2014, October 27, Smart Beta Panel.  Pictured: (L-R) Michael Maduell, SWFI, Mark Sodergren, Northern Trust, Luciano Siracusano, WisdomTree, Riti Samanta, SSgA, Simon Lansdorp, Robeco.

Institute Fund Summit Europe 2014, October 27 at the Jumeirah Carlton Tower – Smart Beta Panel. Pictured: (L-R) Michael Maduell, SWFI, Mark Sodergren, Northern Trust, Luciano Siracusano, WisdomTree, Riti Samanta, SSgA, Simon Lansdorp, Robeco.

Factor-based strategies are gaining foothold among institutional investors of all stripes. One compelling reason is that investors are concerned about the risks of cap-weighted indices. These indices tend to favor large companies and can perpetuate a cycle of overvaluation – think of Enron and Lehman Brothers. These rules-based indices are exhibiting visigoth behavior on traditional managers, as a swath of institutional investors continue to seek out more information about smart beta. The large sovereign funds like the Abu Dhabi Investment Authority and Norway’s Government Pension Fund Global manage mega portfolios of listed equities. Smart beta is a way to cut down on costs. Japan’s Government Pension Investment Fund (GPIF), has hired a number of smart beta managers including Goldman Sachs Asset Management, which benchmarks itself using S&P GIVI (Global Intrinsic Value Index), a S&P Dow Jones rules-based index focused on intrinsic stock value. With a cost structure lower than active management, but allowing more control than traditional index funds, smart beta seems like a promising concept for investors. Active managers critique smart beta on that it cannot reliably and consistently beat the markets. Countering, proponents of smart beta say what strategy has ever, consistently beat markets.


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Globally, institutional investors are probing deeper into smart beta. From a historical standpoint, European pensions were the early institutional investor adopters of smart beta. According to the Sovereign Wealth Fund Institute’s smart beta survey, which includes 72 public institutions, featuring 16 sovereign wealth funds, with over US$ 2.9 trillion in public investor capital, 67% claim to already have smart beta allocations or are currently in the evaluation process. When it comes to sovereign wealth funds in the survey sample, 37% say that they have allocations to smart beta, while another 25% say that they are currently evaluating a smart beta strategy.


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