Balanced Investing Yields Good Returns
The introduction of passive investing changed the investment management industry, which had been dominated by active fund managers. Passive funds allowed investors to receive market exposure at a fraction of the cost of active funds. However, most traditional indices are designed to weight their securities according to their market capitalization, resulting in a portfolio with high concentration and momentum biases.
Combining Active and Passive Investing
Some investors seek to combine the benefits of active and passive investing to achieve enhanced results while maintaining the low cost and systematic benefits of passive investing. Smart Beta combines the power of both passive and active strategies, using a measure other than market capitalization to determine weightings in a portfolio.
By breaking the link between the price of a security and its portfolio weight, a Smart Beta approach seeks to overcome the pitfalls of traditional indices while retaining most of the advantages of passive investing. Smart Beta strategies aim to provide investors with enhanced risk and/or return characteristics, relative to traditional market cap-weighted indices.
How Smart Beta Works
Given portfolio weights are anchored to a measure other than price, most Smart Beta funds will engage in value-based trading at the time of rebalancing. The fund will sell securities that have risen in price relative to their true value and buy securities that have fallen in price. While Smart Beta strategies offer the potential for excess returns in the long term, investors should be aware that they may underperform traditional indices periodically.
Active strategies may result in portfolios with more variable risk exposures, leading to less predictable return profiles over time, and higher stock concentration risk. Smart Beta funds generally seek to provide investors with greater control in relation to their risk exposures and greater diversification by anchoring portfolio weights to a non-price measure.
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Examples of Smart Beta in Action
Betashares has a range of PIE funds that offer the best of both worlds – intelligent indexing for outperformance potential beyond broad market beta and the cost effectiveness typically expected of passive funds. The Betashares Global Quality Leaders Fund seeks to track an index designed to provide effective exposure to 150 of the world’s highest quality companies, evaluated based on key quality characteristics such as return on equity, debt to equity, and earnings stability.
The Betashares Australian Investment Grade Corporate Bond Fund (NZD Hedged) seeks to provide exposure to a portfolio of up to 50 senior, fixed-rate, investment grade Australian corporate bonds, hedged into NZ dollars. The fund selects bonds based on expected returns rather than debt outstanding, seeking to avoid the shortcomings of traditional debt-weighted indices and provide higher returns.
Low-cost index-tracking funds, including broad market exposures, together with ‘smart-indexing’ exposures, can provide an excellent toolkit for building a strong core over the long term. Investors should consider their particular circumstances, including their tolerance for affordability, when evaluating Smart Beta strategies.
Investment value can go up and down, and an investment in the Funds should only be considered as a part of a broader portfolio. For more information on risks and other features of the Funds, please see the Product Disclosure Statement, SIPO, and OMI available on the website.
It is essential for investors to assess their individual financial situations before investing.
