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Get Smart: LSE Looking To Smart Beta

The word “smart” has been drilled into the marketing lexicon for so long it is sometimes hard to tell what is and isn’t actually, well, smart.

Smart phones, smart cars, smart watches and even a smarter planet. The investment world has seen its own branding with so-called smart beta, which was examined in depth by FTSE Russell in May, the first time the LSE’s FTSE index division put its names together with Frank Russell since the exchange purchased the US index and asset manager last year. Five years ago, LSE bought out Pearson’s share of FTSE to gain full control of Britain’s flagship index line.

Around the same time as the LSE’s $2.7 billion Russell acquisition, Russell published its 2014 “smart beta survey” – a questionnaire targeting various types of institutional investors to better understand how the perception and adoption of smart beta have continued to evolve globally.

(For a short primer on the topic, have a look at this interview I did with Russell last year Index Evolution: Guillermo Cano Looks at the New Generation of Equity Indexes, John Lothian News, 2014).

Now one year later, “Smart Beta: 2015 global survey findings from asset owners” has been released. A copy may be downloaded HERE. The results show that smart beta interest and usage continues to grow and there is a trend toward strategy indices that incorporate smart beta strategies.

“It all comes down to three things – adoption, implementation and education.” Rolf Agather, managing director for North America for FTSE-Russell told JLN.

The survey indicates not only a rise in the number of users of smart beta strategies, but also an increase in the percentage of total portfolios allocated to smart beta – “55 percent of respondents with an allocation to smart beta have allocated 10 percent or more to smart beta,” Agather said. “Most look at four or more strategies in order to achieve multiple objectives.”

He said the move toward smart index implementation is not necessarily displacing active managers, but rather is being used as a tool by managers to fine-tune objectives in an efficient and cost-effective manner.

“Survey respondents were split down the middle in terms of active and passive management,” he says, adding that most are in it for the long haul. “71 percent of respondents plan to hold a smart beta index for five years or more.”

And Agather points out that the term “smart beta” is a marketing term, not an investment term. When the firm refers to such strategies they are talking about two chief strategies – factor-based modeling and strategy-based modeling.

Finally, Agather stressed the need for education. He grouped the FTSE-Russell’s education efforts around three metrics – how an index is built (the methodology), how an index behaves (current return profile plus a look-back period), and how an index interacts (with other indexes and/or inside a portfolio).

That is something to which we all can agree. Anything with “smart” in its name needs to have an education component.

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Doug Ashburn is a former editor-at-large of John Lothian News. He left in late 2016 and is now the managing editor of T3 Custom.