Enhance portfolios with
Smart Beta strategies

What is Smart Beta?

Smart Beta strategies primarily focus on factors that have historically been persistent drivers of returns across equities and other asset classes. Whether they use a multifactor or a single factor approach, Smart Beta strategies give investors the potential to fine tune their exposures and reduce unintended risks. As a result, using Smart Beta strategies can result in a more deliberate allocation to potential sources of risk and return.

What is Smart Beta?

Sara Shores, Global Head of Smart Beta for BlackRock, explains how smart beta seeks to
• Enhance returns
• Improve diversification
• Reduce risk

Exploring factors

Factors are time-tested sources of historical returns within and across asset classes that are at the heart of Smart Beta strategies. Institutional investors and active managers have been using factors to build portfolios for decades. While the concept of factors isn’t new, the use of factors is being revolutionised by technology. Advances in financial analytics mean large amounts of market data can be screened with blinding speed, allowing factors to be isolated and surfaced with greater precision.

Types of factors

There are two main types of factors that have driven historical returns: macroeconomic factors, which capture broad risks across asset classes; and style factors, which help to explain returns and risk within asset classes.

MACROECONOMIC FACTORS

Macroeconomic factors capture broad risks that exist across asset classes. Our research suggests that risks associated with economic growth, real rates, inflation, credit, liquidity, and emerging market factors explain over 90% of asset class variation.

ECONOMIC GROWTH
exposure to the
business cycles

 

CREDIT
Lending to companies,
as opposed to governments

REAL RATES
Bearing risk of rising rates

 

EMERGING MARKETS
Absorbing the additional
political and economic risk
from investing in emerging markets

INFLATION
Assuming exposure to changes in prices

 

LIQUIDITY
Holding illiquid assets

STYLE FACTORS

Style factors explain risks and returns within asset classes, including not just equities but also fixed income, commodities, currencies, and even private markets like private equity and real estate.

MINIMUM VOLATILITY
Stable stocks can potentially outperform
more volatile stocks on a 
risk-adjusted basis

 

QUALITY
Financially healthy firms
have typically performed
better over time

MOMENTUM
Stocks with strong
recent performance have tended
to maintain higher returns

 

SIZE
Small, high-growth companies
have tended to outperform
their larger counterparts

VALUE
Inexpensive stocks relative
to fundamentals such as
price-toearnings have
tended to outperform

Questions?

If you have any questions or would like to find out more about Smart Beta strategies, please contact your investment consultant or relationship manager.