Warning on smart beta products

Institutional investors have been increasingly looking to smart beta strategies, but they need to be careful about their selections because not all smart beta products are created equal, according to a new analysis issued by Willis Towers Watson.

The analysis revealed that Willis Towers Watson's institutional investment clients globally last year allocated $10 billion via 175 and that liquid alternatives attracted the most interest with over $8.1 billion of which approximately half was is in smart beta and where $1.9 billion was in secure income strategies.

Commenting on the analysis, Willis Towers Watson global head of manager research, Luba Nikulina said that given the stage reached in the investment cycle, the company's clients had continued to diversify their portfolios to protect against downside risks while also rotating towards higher-skill mandates to take advantage of the increased market volatility.

"Clients continue to use smart beta solutions, as reflected in the high number of selections, which utilise systematic approaches to exploit those alternative-risk premia that provide true diversity beyond equity and credit," she said.

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Nikulina said that, in addition, secure income strategies had proved very popular last year as even de-risking clients were happy to embrace illiquidity if it provided them with some liability matching characteristics"

Reflecting on the analysis, Nikulina said it was positive that investors were thinking smartly about betas across all return drivers in their portfolios but there was a need for caution.

"However we are genuinely concerned about the proliferation of products claiming to be smart beta, particularly in the equity area," she said.

"Not all smart beta is created equal: it should be easy to describe and understand but many labelled products are not, are often poorly implemented and seem naïve about the inherent risks. Investors should beat a smart retreat from these."