The days when Australia “rode on the sheep’s back” may be long gone, but agriculture remains a critical component of the economy, generating valuable export income. While overseas investors understand its importance, for most local institutions it’s still a bridge too far.
For several years, investors, from institutional to retail, couldn’t get enough of the tech stocks with all their promises of future growth. But now the market has spoken and it’s saying precisely this – valuations matter again.
Smart beta getting smarter as judgement is introduced
The trend to use new “smart beta” strategies appears to be gathering pace as fund managers broaden their offerings and seek to better differentiate their management styles and approaches.
There is not yet a consensus about what constitutes smart beta but the investment management industry is pretty good at refining its jargon, especially when it has the attention of the funds which are looking to use the strategies.
In Australia, the introduction of the MySuper rules for default funds from July has focused more attention on ways to reduce management fees for a so-called “low-cost option”. Putting aside the debate about whether this will actually be good for members over the long term, a growing realization that plain vanilla index funds have their faults has led to strong interest in both tilted index funds, such as fundamental index or low-volatility strategies and others, and smart beta offerings.
“Smart beta” is currently used to describe a grab bag of styles and processes which look to provide much of the upside of a broad market, while subtracting some of the downside. There are lots of ways this can be done, or at least attempted. Fees tend to be higher than those for standard index funds and lower than traditional active management.
AXA Investment Managers held a series of roundtables in Australia last week to unveil its smart beta strategies for both global equities and bonds. Armed with the firm’s erudite head of institutional client strategy, Tim Gardener, the former long-time CIO of Mercer in London, AXA-IM argued that index tracking of any kind has short-comings.
“I think that the alternative indices are better than a market-cap index,” Gardener says. “But my feelings about index tracking make me worry. For example, it is easy for market makers to take positions when the index changes.”
The AXA-IM smart beta strategy uses rules to filter the global equities index, say, down from about 1600 stocks to about 800, but “there is flexibility in the application of the rules”.
In contrast to index trackers, the manager aims to avoid rules which will make it a forced seller in certain circumstances, such as a bond being downgraded.
“It’s a practical strategy designed to harvest maximum beta using common-sense principles,” Gardener says. He admits that such a style can offend purists and mathematicians because of the “fuzziness” of the rules.
After culling the universe, AXA-IM diversifies the portfolio away from any cap-weighted bias or other concentrations.
Gardener says the end result is a portfolio which tends to have quite different characteristics from one which follows a fundamental index – which was devised by US academic and manager Rob Arnott.
“Rob Arnott devised an index, not a strategy. They are two very different objectives,” Gardener says. “Our portfolios tend to be less extreme. There are not the same biases to value and small caps.”
He says AXA-IM’s rules are designed to interact with market conditions. The portfolio will tend to have a low price-book average, indicating value, and above-average dividend payouts because of the low-paying stocks being filtered out.
The strategy can also fit in with others, such as ESG, size or style biases according to the investor’s requirements.
