Just 15% say track record is very important when investing in smart beta, according to exclusive research by Engaged Investor and HSBC Asset Management

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.

“Trustees are a cautious bunch,” says Ian D’Costa, an associate director at law firm Sackers. This makes sense; they are responsible for investing significant sums of other people’s money.

Usually this translates into trustees closely scrutinising past performance. But this consideration did not always form a major component of their smart beta decisions, as Engaged Investor found in its exclusive research, which was sponsored by HSBC Global Asset Management.

Only 15% of respondents to a survey said a smart beta fund’s track record was very important. Almost a quarter (22%) said it was neither important nor unimportant.

The relevant track record, if it’s a good passive manager, is just to do what it says on the tin

The nature of smart beta could go some way towards explaining why track record was less of a deal breaker for trustees than it might be for other investment products. For a start, smart beta funds tend to follow an 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,” says Jo Sharples, an investment principal at Aon Hewitt. Therefore, the trustees may choose to consider the past performance of the manager rather than the fund itself.

Smart beta strategies are also still comparatively new. “Track records will be too short to mean much or be back tested,” says Steve Delo, an independent trustee who is chief executive of PAN Governance. “I am pleased to see trustees starting to put less emphasis on track record - it should be more about understanding the offering, the manager, the risks, [and] the costs”.

Track records will be too short to mean much or be back tested

Of the few who did require their managers to demonstrate a solid track record, the most common expectation (47%) would be that the minimum record should be three years, which is seen as an industry standard. Only 9% said one year would suffice, whilst 34% wanted more than three, so again this question was polarising – track record was either crucial or it wasn’t, and there was little grey area in between.

“I can see the argument why you would not need a long track record, but I think… you would want every aspect of [their management of your assets] to be explainable, otherwise the worry would be that they’re not applying these principles in the systematic way you believe they should be,” says LCP partner Mark Nicoll.

Ongoing monitoring of asset managers is crucial to make sure they are performing well and meeting the objectives set out by the scheme – whether you are investing in smart beta or any other asset class.

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.