European defined contribution plan sponsors are beginning to reconsider the value of smart beta investments in their portfolios because of disappointing performance.
Smart beta — an umbrella label for factor-driven equity strategies that combine elements of passive and active investing — had a strong run in terms of inflows. Assets invested in broad smart beta strategies more than doubled to $990 billion at year-end 2017 from the start of 2014, according to data from Morningstar Inc., Chicago.
However, moving into 2019, investors — due to increasing volatility in equity markets — are questioning if they have sufficient equity allocation and the wisdom of holding smart beta strategies.
"What we're seeing across the board is plans rethinking their approach and adopting innovative ways to be able to generate returns in the coming low-returns and high-volatility era," said Christian Lemaire, global head of retirement solutions at Amundi in Paris.
"We are also seeing many pension funds invest in passive products, such as index funds, to benefit from lower fees. If you look at asset allocation in particular, smart beta is the least embraced," he said.
The €300 million ($341 million) United Pensions, Brussels — a multiemployer, cross-border fund — already has reduced its exposure to smart beta equity to zero from 35%.
The United Pensions plan, which is sponsored by Aon PLC, runs the retirement assets of corporations such as Dow Chemical Co., which moved its European retirement plans' assets into United Pensions' cross-border arrangement in 2018.
Hans Rekker, client executive, retirement solutions at Aon Netherlands in Amsterdam, cited under-performance from smart beta strategies as a reason for United Pensions to replace them with simple passive strategies in its €43.5 million equity portfolio.
"We introduced smart beta around three to four years ago ... (but) the return was not as expected. It was worse than simple passive," Mr. Rekker said.