Home / Beta trends: you say ‘smart’, we say ‘advanced’

(Pictured: Jennifer Bender)

With the evolution of what most people call ‘smart beta’, but State Street calls ‘advanced beta’, Jennifer Bender says that the two overriding trends are the recognition that these are new beta tools to be used to mix and match depending on the investor’s profile and that there are strong diversification benefits to be had.

Bender, a State Street Global Advisors’ managing director and head of research for Global Equity Beta Solutions, visited Australia last week from Boston, speaking to clients and others about the unfolding trends in what is probably the largest-single wave of new investment processes the industry has seen since before the GFC.

Bender said, however, the notion of Advanced Beta is not new, nor are its fundamental underlying drivers. “Advanced beta is any transparent and consistent process which is driven by investment exposures to outperform cap-weighted indices,” she said. “The exposures, or factors, are all well-researched tried and true investment styles.”

The main ones used in the older world of tilted indices, which SSgA has done for years for some of its clients within its passive portfolios, are: value, small caps, quality and momentum. With its Advanced Beta unit, which offers various blends of factors in an array of investment strategies, SSgA has added factors such as low-volatility, for instance, to a quality stock portfolio to provide both stable earnings and stable prices in the current environment.

“Advanced Beta is not traditional passive investing,” Bender said. “It’s not meant to replace market-cap indexing. Market-cap weightings are the only things investors can hold in aggregate. With Advanced Beta, if you are long low-volatility someone needs to be short it. Or if you are long value someone needs to be short it. You can never be ‘all in’ with Advanced Beta.”

She said that with the increasing demand for these strategies, fees were “a huge driver” facilitating the trend. “Advanced Beta is as much about reducing costs and improving efficiency as it is about returns. Costs are up front and definite whereas returns are not as easy to predict.”

Bender uses the analogy, in a total portfolio sense, of the way many people do their regular shopping: “People may use stores like WalMart for their basic goods and then shop elsewhere for some specialist or higher-quality goods… You are just deploying your money more efficiently.”

Susan Darroch, the Sydney-based regional head of the Advanced Beta division, said SSgA used all its other tools in implementing Advanced Beta strategies, such as internal crossings and algorithmic trading, to keep costs down.

“We manage hundreds of indices internally, so we are never going all in the one direction,” she said, a reference to the fear that quantitative investment styles, when widely adopted, may lead to tipping the whole market.

SSgA has about US$1.3 trillion in index and Advanced Beta strategies, out of its total funds under management of US$2.48 trillion (as of June 30). It also has US28.4 trillion of assets under administration, a lot of which it is able to use within its dark pool for crossing and securities lending.