Smart beta not always the more intelligent solution

While the number of products has threefold within the last five year, the AuM of smart beta products grew to 73 billion Euro. An analysis shows that the performance depends massively on the concept, time frame and region.

Smart beta includes products, which try to overcome the weaknesses of classic market-cap weighted indices and achieve a factor premium. Within the last five years, the number of products has threefold and the assets under management in smart beta products grew, according to Morningstar, to 73 billion Euro until the end of 2014.

Doing so, smart beta is not always a concept to minimise risk, nor to increase performance. The success of such strategies depends massively on the chosen region. While smart beta products focusing on the US or investing globally have outperformed their market-cap based benchmarks, they have underperformed when focussing solely on Europe. This shows an analysis of Absolute Research.

Of course, the success of smart beta products depends on the implemented concept and rules used to weight stocks. Risk minimising products are stronger during weak market times, while cyclical products are stronger in well performing markets. “Smart beta concept are automatically neither risk minimising nor performance optimising than classic indices,” says Absolut Research in German press release.

Within in 36 months, all analysed products have underperformed their benchmark. The performance is, with 13.32 percent, about 1.5 percent points lower than the MSCI World - and they do so with a higher monthly standard deviation.

“Over the long term, smart beta concepts have clearly outperformed classic market-cap weighted benchmarks. Doing so, investors must keep in mind that the alternative weighting of indices may also shift regional or industrial focuses and that market risk cannot really be reduced with smart beta. Institutional investors with tight capital budgets should consider this and use other factor strategies as appropriate,” says Michael Busack, managing director of Absolut Research GmbH.

In their analysis, Absolut Research has evaluated alternatively weighted indices and funds concepts within their publication series Absolut|analyse. The basis for this analysis are monthly published analyses of asset managers. 148 have been analysed.