Our panel of three industry experts – James Price, investment consultant, Towers Watson. Jo Sharples, investment principal, Aon Hewitt and Mark Nicoll, partner, LCP – spoke to Laura MacPhee about how schemes are investing in smart beta in the second of this three part series.

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This is an excerpt from the ’Smart beta - your guide to alternative indexation’ report, produced by Engaged Investor, in association with HSBC Asset Management. To download the full report, click here.

Laura MacPhee: When choosing a smart beta fund, survey respondents selected methodology as the most important consideration. What do you make of that finding?

 

Jo Sharples, Aon Hewitt

Mark Nicoll: I think if you had any doubts that it was going to be a robust process you probably wouldn’t go down that route in the first place. What you’re looking for is for the manager to apply a series of principles in a disciplined way. If that’s absent you wouldn’t consider the approach – just because it’s a lower fee, or for some other reason.

 

James Price, Towers Watson

James Price: We would agree that understanding the methodology, and understanding the investment process is very important when you’re investing in any product – whether it’s smart beta or alpha seeking. This is particularly the case with smart beta, because what you’re buying is the process.

If that process involves a high degree of evolution, or a high reliance on particular individuals and their decision-making investment input, then it’s probably more in the active quant arena than the smart beta arena.

To that extent having a clear idea of the methodology that’s being used is important to understand what you’re buying.

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Laura MacPhee: The lowest priority for schemes was brand – why might that be?

James Price: I suspect it speaks to the fact that asset owners are using these to explicitly manage things like risks and costs, so finding the strategy or product that will sit within an asset owner’s portfolio is more important than finding a product that is backed by a particular brand or is particularly popular.

Jo Sharples: If you have three or four managers who are all offering seemingly identical products, your choice will be based on things like client service and cost at that point. I can see that brand’s not particularly important there. Trustees are not particularly concerned about going for a brand as long as the product’s right and the cost is right.

Laura MacPhee: Why do you think survey respondents were less concerned about the track record of smart beta funds than one might have expected?

Mark Nicoll: The track record these managers would have should be much more predictable. Because it’s a relatively systematic approach, I think you can put more reliance on that than somebody whose approach is much more subjective, where you do need to see them actually managing assets for a period of time.

Jo Sharples: When you look at track record, they tend to track their relevant index. To some extent the relevant track record, if it’s a good passive manager, is just to do what it says on the tin.

Also, when you actually look at the performance of the different strategies in different market conditions, there are times when some do a lot better than others. The important thing is understanding when that is, and if the strategy is the right strategy to have in certain market conditions.

This is an excerpt from the ’Smart beta - your guide to alternative indexation’ report, produced by Engaged Investor, in association with HSBC Asset Management. To download the full report, click here.