Investors piled into smart-beta
funds in the first quarter of 2017, driving a 2,000% rise in new money
allocated to the popular investment strategies despite warnings that their
performance could go “horribly wrong”.
Smart-beta funds, which act as a
halfway house between active and passive management, drew a net $24bn in the
first three months of the year, up from $1bn during the same period in 2016.
Asset managers including
BlackRock, Legg Mason, Franklin Templeton and Amundi have rushed to launch
smart-beta funds in response to growing demand from investors for products that
aim to beat the market at a low cost.
Andrew Ang, head of factor investing
strategies at BlackRock, the world’s largest asset manager, said smart-beta
funds have gone from “strength to strength” as investors sought out “efficient
low-cost access to persistent drivers of returns”. “In 2016, we saw demand for
smart-beta exchange traded funds surge to record highs. We have also seen a
strong start to 2017.”
In the first quarter, smart-beta
funds raised almost half of the $57bn of new money amassed in 2016, according
to figures from ETFGI, the data provider. Smart-beta funds now account for a
seventh of the $4tn invested in the global ETF market.
But there are concerns about the
rapid growth of smart-beta strategies, which typically track an index but tweak
it to generate above-market returns, such as by excluding volatile stocks.
Last year Rob Arnott, who has
been described as the godfather of smart beta, warned that investors in these
strategies could be hit by large-scale losses. Mr Arnott’s company, Research
Affiliates, developed some of the world’s first smart-beta indices. He said at
the time: “In the next three to five years, I expect [some smart beta
investors] will end up very disappointed.”
There are also concerns that the
rapid growth of the ETF market, which includes smart-beta products, could have
a damaging impact on markets.
But Martin Weithofer, head of
strategic beta at Deutsche Asset Management, Europe’s third-largest fund house,
played down these concerns. He added that smart-beta strategies only account
for a small chunk of the global investment market.
“Looking at the overall assets
under management globally, [the size of the] passive [fund industry] is only a
fraction of active. And purely looking at smart beta, it is a small fraction of
the passive market.”
He added: “The risk is low. There
is still room to grow. I would not be too concerned that the market is crowded
or [pay much attention to] certain performance concerns.”
Mark Fitzgerald, product
management manager for Europe at Vanguard, the world’s second-largest fund
house, added that investors are turning to smart beta as a source of returns in
the low-yield environment.
According to ETFGI, smart-beta
funds that focus on so-called fundamental investing, meaning they are designed
to invest in indices that focus on factors such as growth or value stocks, had
the strongest inflows of all smart-beta products this year.
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