Active managers will have to prove they can consistently beat smart beta strategies to justify their fees, argues State Street Global Advisors.
Speaking in Sydney on Thursday, SSGA Asia-Pacific global portfolio strategist Thomas Reif said active fund managers would have to prove they could deliver value beyond what a smart beta fund could.
“For a value manager to add value to your portfolio, he better beat the value of smart beta portfolio,” Mr Reif said.
“That’s your real benchmark.”
He described ‘smart beta’ as an evidence-based, market-tested way of investing that ‘blurred the boundaries’ between active and passive investing.
“You can see that it’s a passive way of investing, but it’s investing according to an active benchmark,” Mr Reif said.
“So you’re getting all of the benefits of active management and you’re also reaping many of the benefits of passive investing.
“It’s very much a competitor to active management.”
Smart beta investment strategies are able to simultaneously assess a multitude of factors that active fund managers consider, such as value (buying low and selling high), quality (viable business) and low volatility (the demonstration of relative stability), according to a statement by SSGA.
However, where single factors are often subject to cyclicality, smart beta strategies would offer exposure to multiple factors, thereby smoothing performance against erratic market conditions.
SSGA senior investment strategist Rafiq Choudhury said some institutional clients were paying unnecessarily high fees for active management.
“We do a lot of work with clients to go ‘you’ve bought these 40 active managers. You think this is what you’ve bought. You’ve actually bought a really expensive factor-based portfolio,” he said.
“Because when you take all the exposures, add them all together, you end up just back at your starting point.”
When asked if smart beta strategies would make active managers redundant, SSGA Asia-Pacific head of portfolio strategies Jonathan Shead said there was still a place for them.
“We still think there’s a role for active management. It’s just raising the bar.”