Smart Beta: The Future of Investing or Marketing Fluff?

February 10, 2015


Smart beta promises enhanced risk-adjusted returns. But does it deliver? The Journal of Indexes Europe has gathered the sharpest minds in indexing to discuss where the industry is heading, how smart beta has performed to date, and how regulatory changes could shape this category in the future.

JOI Europe: What impact have the recent regulatory changes had on the indexing business?


Chris Woods
Managing Director,
Head of Policy and Governance,

To date, the biggest impact has resulted from the requirement for index firms to publish a statement of compliance with respect to the IOSCO [International Organization of Securities Commissions] principles for financial benchmarks. These principles cover the topics of benchmark governance, the quality of the benchmark, the quality of the methodology, and the accountability of the administrator to clients and regulatory authorities.

In preparing their statement, index firms have had to consider the effectiveness of their existing control frameworks, their oversight of third parties and the conflicts of interest, real and potential, which might cause the integrity of a benchmark to be questioned. In addition, firms calculating fixed income indexes based on submissions received from dealers have had to address the requirement to impose a code of conduct on those supplying the submissions.

These requirements have led some firms, particularly banks, to relinquish their calculation of certain indexes. This trend is likely to continue if the European Union enacts legislation to regulate benchmark administrators along the same lines as those set out in the IOSCO principles. The result is likely to be further consolidation amongst index providers. Benchmarks calculated by these providers will be administered to higher standards and engender greater confidence in index consumers. However, this could come at the expense of less choice and potentially higher cost as index firms staff up to meet the regulatory requirements.


Craig Lazzara
Global Head of Index
Investment Strategy,
S&P Dow Jones Indices

It's gratifying to see that the market is finally moving toward a model for benchmarks where indexes are independently calculated, free of conflict between commercial and governance functions, uncompromised, relevant, and transparent. Going forward, we expect the impact to index providers from regulatory changes to continue especially in Europe and feel we are well positioned to meet any requirements.


Rolf Agather
Managing director,
research and development,
Russell Investments

We believe the regulatory work [including transparent index design and methodology] done over the last year, particularly in Europe, has been very helpful to the indexing business overall. While a new defined set of index standards has not driven a need for us to change our existing processes, it does help create comfort among our clients and constituents and help to reinforce our already existing processes.



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