Differentiating your offering: How smart beta could help

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

How can smart beta help
your clients’?

Smart beta is a topic that’s hard to avoid – open up a financial news site and chances are there will be an article or reference to this fast-growing space. As a category, global smart beta assets have grown from US$184 billion to US$729 billion in 2017 – that’s a 19% organic growth rate! 1

Research projects that assets will reach US$1.4 trillion by 2022 – that is almost the same size as Spain’s GDP.1,2 With all of this buzz arounds smart beta, it is no surprise you might be interested to learn more about how they can help you.

  Source: BlackRock as at 31st December 2017
  2 Source: World Bank. Most recent GDP data as at 2017.

1. Access to proven drivers
of returns

Factors are not new. In fact, factors are present in all portfolios. As long as there have been markets, investors have sought to buy cheap, high quality, trending, smaller size or lower risk stocks. There are five rewarded style factors - value, quality, momentum, small size and low volatility. These factors have been persistent drivers of returns across asset classes for decades and we expect them to endure for decades to come because they have well-studied and well-understood economic foundations.

 What’s changed is how investors can access these drivers of return. Over the past few decades, most investors would only access these rewarded characteristics, or factors, through actively managed strategies. Smart beta now provides investors with the ability to access these factors through a cost-efficient and transparent ETF.

How could investors use smart beta?

One of the most elegant ways to implement smart beta is to use as a replacement or complement to traditional style managers. It’s a fact. It’s hard for investors to select active managers. According to well-known studies, 72% of large-cap mutual fund managers have underperformed their benchmarks over the last five years and have charged over 1% in the process.3

 When managers are underperforming it can be challenging to justify their high fees to your clients. How can smart beta help? Investors could consider replacing the higher-cost, underperforming value and growth managers with value and momentum smart beta ETFs.

 3 Source: SPIVA Report as at 31st December 2017. Morningstar as of 31/3/18

 Yesterday's value, blend and growth are now today's Value, Quality and Momentum factor investments.4 

Reasons-to-sell-factors

 

Source: Morningstar, BlackRock as at 30th June 2018. For illustrative
purposes only

  • Smart Beta ETFs may help investors outperform the market, at a
    lower cost 3

2. It can help to scale portfolios for today’s challenges

The investment landscape is constantly evolving. In addition to facing an environment characterised by very low returns, the competitive pressures within the advisory space, such as the rise of digital wealth, continue to grow.

Indexing the core of your clients’ portfolios with traditional index strategies may help to provide a repeatable investment process that is low-cost and transparent. However, in such a competitive market, the need to differentiate your offering has never been stronger.

How can smart beta help?

Smart beta can be used to complement an existing index strategy. A multi-factor smart beta ETF can provide additional diversification and potential return benefits while still keeping transparency high. As shown below, a multi-factor approach has outperformed the standard market-cap weighted benchmark.

Smart Beta investing can help differentiate your investment approach

Reasons to sell factors Digital Chart

The figures shown relate to simulated past performance. Simulated past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Source: Bloomberg as of 28/02/2018. Index returns are NTR USD for the period 31/12/1999 – 30/06/2018. MSCI World Multi-factor Index designated as World Multi-factor. World Multi-factor targets a diversified mix of companies that exhibit exposure to well know historically rewarded factors: quality, momentum, size and value. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. This analysis contains back-tested index data. Data for time periods prior to the index inception date is hypothetical and is provided for informational purposes only to indicate historical performance had the index been available over the relevant time period. 

 

31/03/2013
To
31/03/2014

31/03/2014
To
31/03/2015

31/03/2015
To
31/03/2016

31/03/2016
To
31/03/2017

31/03/2017
To
31/03/2018

World Multi-Factor

22.21%

10.37%

-1.78%

12.49%

20.06%

MSCI World

19.07%

6.03%

-3.45%

14.77%

13.59%

  • Smart Beta ETFs provide a new solution to add to your investment toolkit

3. It's cheaper

Smart beta could help to address a number of challenges you might be facing when managing a portfolio, such as replacing underperforming managers or enhancing the core of your portfolio. The best part: it’s lower cost.6

Smart beta is simple - it targets long term rewarded drivers of returns and provides them to your clients in a new way. A new way that is powered by data and technology, and could be delivered in a smart beta ETF. Finally, it’s completely transparent so your clients know exactly what’s in the portfolio and how it is generating returns.

6 Source: SPIVA Report as at 31st December 2017; Morningstar as of 31/3/18. Average charges of large-cap mutual fund is 110bps vs most expensive iShares Smart Beta UCITS ETF at 50bps.

  • Smart Beta ETFs could help your clients save money

Three facts to start the conversation

Reasons to buy Chart 2

7 Source: 1970- Paul Samuelson (deceased), 1981: James Tobin (deceased), 1990: Harry Markowitz, John Lintner (deceased), Bill Sharpe, 1997: Robert Merton, Myron Scholes, 2013: Eugene Fama, Lars Hansen, Robert Shiller, 2017: Richard Thaler.
8 Source: SPIVA Report as at 31st December 2017; Morningstar as of 31/3/18

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