Implementing A Popular Approach

March 11, 2015

Strategic Indexing, or ‘smart beta’ as it is more commonly referred to, is set to be the biggest area of growth for exchange traded funds this year, according to consultancy Ernst & Young’s Global ETF Survey, published in November last year.

But who is using smart beta, and how are they accessing these strategies? Is it a product just for the sophisticated investor, or can the retail arm benefit too?

ETF Report UK speaks to three fund managers to answer these questions as well as to discover their smart beta ETF views, how they use the products, what they think could be improved and what the benefits are for investor portfolios.


Edward Allen, investment director at Ingenious Asset Management:
Yes, but we are cautious.

It gives us exposure to an underlying theme and to academically tested ideas. But we are still cautious for several reasons. These include fears around backtested systematic trading systems, many of which have not had long ‘live’ track records; high turnover funds, where what you think you own may change; and fears that accounting figures lead to systematic decision making.

Alan Miller, co-founder at SCM Private:
We use smart beta when we can understand the particular tilt being employed; where we can see that the valuations of the underlying stocks are more attractive than a conventional market cap weighted index; and that the extra costs, including trading-related costs, of the smart beta product are reasonable compared to the expected outperformance.

Peter Sleep, senior portfolio manager at 7IM:
About 20% of our portfolios are smart beta investments, across both equity and fixed income. We use funds and futures, we run our own regional value portfolios and we even use ETFs. We mainly seek to exploit the value factor ourselves, but we also use third party strategies like Tobam’s Maximum Diversification index series.


Edward Allen: A systematic and efficient exposure to a theme at a low cost.

Alan Miller: In essence, much of our portfolio is employing smart beta through our overall asset allocation by tilting to those assets where we see the most value—we can easily buy a value or growth, large cap or small cap strategy, or a particular market, at opportune times and often at much lower cost than many smart beta products. Where our clients can benefit in terms of extra risk-adjusted returns, net of costs, we will use smart beta products.

Peter Sleep: 7IM uses smart beta across all funds, particularly in the equity area, but increasingly in the fixed income area. We use smart beta strategies because we believe the evidence is overwhelming that they add value to our clients through time.

It’s a case of better performance at a lower cost. Some smart beta strategies, or blends of strategies, also help improve the diversification or lower the volatility of client portfolios, but this is not universal.



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