Complexity remains a key concern. Luba Nikulina, global head of manager research at Towers Watson, says: “We believe smart betas should be easy to describe and understand, which many of these labelled products are not as often they are poorly implemented and seem naïve about the inherent risks. While growth has been phenomenal in the past five years, we expect to see continuing demand.”
Mr Molloy agrees some products have become too complex and investors need to understand what they are getting.
Equally, Mr Horsell says: “We are careful not to over-engineer [products] such that investors don’t know how to fit them into a portfolio.”
He thinks there will be a limit to the growth of the industry. “These products can’t be too sophisticated for people to understand how they work,” he says.
“It is still a rules-based approach, and this is more economical than appointing an active manager.”
Smart beta has its place in a portfolio, but is not being used as a replacement for active, but to draw out specific factors – to raise the income on a portfolio, or to give it a value or growth skew.
Complexity may be an issue, but the smart beta industry is aware of the problem. As the wider passive market gains ground, investors may slowly come round to the idea.
Cherry Reynard is a freelance journalist
Shift to passive products: Study findings
A study by the Boston Consulting Group, called ‘Global asset management 2015: Sparking growth with go-to-market excellence’, finds that the passive products market is set to grow further:
“The product shift of recent years – from traditional, actively managed products to passives, solutions and specialties – held true in 2014, although the move towards specialties has slowed.
“The assets under management (AUM) of active products represented 39 per cent of AUM at the end of 2014 compared with 59 per cent in 2003, while alternatives grew from 6 to 11 per cent, passive products from 8 to 14 per cent, solutions from 6 to 13 per cent and specialties from 21 to 24 per cent.
“This ongoing shift reflects investors’ persistent hunt for more outcome-oriented products, greater portfolio diversification and less-expensive products in core categories.
“We continue to believe that the structural shift from active core products to solutions, alternatives, passive products and specialties will continue. In particular, solutions and passives are likely to get a disproportionate share of the net flows relative to their current size. Therefore, they will remain the fastest-growing categories, squeezing the share of active core products and managers as those products suffer net outflows.”
