Smart-beta strategies have attracted billions of dollars in institutional assets in the past three years, despite the fact that consultants say the strategies haven't yet caught on with their clients.
That just underscores smart beta's staggering capacity, the surface of which has barely been scratched.
Because the strategies are managed passively, new mandates can be eye-poppingly big. But investors have needed time to understand the various smart-beta approaches, and managers have been cautious — and shrewd — about jumping into the space.
“There's been no push from the asset management industry because if you can wrap (investment ideas) up with (active management) and charge 75 basis points for it, why (create a smart-beta version) and charge 30 basis points for it? You're not going to do that,” Chris Ford, London-based head of investment for Europe, the Middle East and Africa for Towers Watson & Co., said at the 2012 National Association of Pension Funds Investment Conference in Edinburgh this month.
“And equally there's been no pull” from investors, who've had their hands full with other issues, Mr. Ford said, adding that he expects demand for smart beta to increase and for the strategy to become a dominant investment theme within the next five years.
Smart beta refers to passively managed non-market-cap-weighted investment strategies, covering all asset classes. The “smart” in smart beta comes from reweighting indexes to boost systematic returns or lower risk.
Globally, Towers Watson clients added $3.1 billion to new smart-beta strategies in 2011, down slightly from $3.3 billion in 2010, according to data provided by the firm. That small decline came despite a doubling in the growth of traditional passive strategies in 2011.
But for some managers, growth of smart-beta assets has been spectacular. For example, assets tracking Research Affiliates Fundamental index tripled to $47 billion in the three years ended Dec. 31, according to data from Research Affiliates LLC. And that's just the beginning, said Michael Larsen, the firm's Newport Beach, Calif.-based director, affiliate relations. “We do expect pretty significant growth in the coming years,” he said. “It will become a substantial component of the passive allocation.”
State Street Global Advisors' smart-beta assets jumped 53% in 2011 to $22.3 billion; that's a five-fold increase from the $4.5 billion run in 2008. SSgA was the second largest index manager in the world with $1.4 trillion under management, according to Pensions & Investments' annual ranking.
BlackRock's smart-beta assets hit $8 billion at the end of 2011, up from just $100 million three years prior. BlackRock is the world's largest passive manager with $2 trillion in total index assets under management.
And at MSCI Inc., the increase in assets tracking its smart-beta indexes (known as “strategy indexes” at MSCI) was “quite dramatic” in 2011 but because it was from a very low base, a percentage increase figure “wouldn't be meaningful,” said Dimitris Melas, London-based executive director and global head of new product research.
Mr. Melas said growth in smart beta often comes in big chunks. For example, the $43.6 billion Taiwan Labor Pension Fund, Taipei, last week announced it would run $1.5 billion tracking the MSCI World Minimum Volatility and MSCI Emerging Markets ex-Taiwan Minimum Volatility indexes. And in December, the $6 billion Wyoming Retirement System, Cheyenne, hired SSgA to run $660 million in passive assets tracking the MSCI ACWI Risk Weight and MSCI ACWI Value Weight Investible Market indexes.