Smart beta strategies can efficiently deliver many of the same themes present in actively managed portfolios, with greater transparency and at a fraction of the cost.
Many investors compare the total return of a fund to a relevant market benchmark. This comparison helps us determine if the manager is faring well or poorly compared to the relevant opportunity set. Any return above that benchmark return is “active” – the value added by the investment manager, beyond exposure to the broad market. A portion of that active return may be the result of the manager’s skill: their unique insights in security selection, country bets or market timing. And a portion of that “active” return can be attributed to the fund’s exposure to style factors, like value or momentum – the very same style factors that can be captured in smart beta strategies.
We think owning smart beta is a good idea, but you may also be paying active-like fees for those exposures. And that’s exactly the a-ha moment – smart beta strategies can efficiently deliver many of the same themes present in actively managed portfolios, with greater transparency and at a fraction of the cost.