2,000% rise in new money allocated to smart-beta funds

Popular investment strategy drew a net $24bn in the first three months of the year.

  • By Attracta Mooney,
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Investors piled into smart-beta funds in the first quarter of 2017, driving a 2,000 per cent 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.

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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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