What big funds think about their next moves


(pictured: Jonathan Shead)

New research by State Street Global Advisors indicates that there is still a lot of work to be done for, even, big fiduciary investors to understand the value in factor investing. The research also shows these investors seem a bit unrealistic about expected returns.

In its regular survey of 400 of the world’s largest fiduciary investors – pension funds, multi-managers and other ‘asset owners’ – SSGA says the results show that in the next little while big funds are likely to search out more alternatives strategies and more active strategies, rather than smart-beta or plain-vanilla index strategies.

But, also, these big funds appear to have an unrealistic expectation about their funds’ returns – on average anticipating a net 10.9 per cent for their portfolios over the next year, compared with a funds manager and consultant consensus figure in the single digits.

Jonathan Shead, SSGA head of portfolio strategists for APAC, said the investor expectations were “ a bit of a surprise”, given the current level of interest rates and inflation. He noted, though, that the survey was conducted late last year, before the February sell-off in global markets and downgrade in growth numbers in the US.

Roughly three-quarters of the survey respondents were happy with the performance of their fund. Of the one-quarter who weren’t, the three most common strategies which they intended to expand upon were: alternatives, active management and objective-based strategies.

Shead said: “Smart beta strategies are included in the objective-based strategies category but they weren’t top of the list… If anything, investors were looking to down-weight their passive strategies.

“For all the talk about smart beta, there seems to still be some confusion around it… I have been talking to funds about this for a long time and I would have thought from my discussions that everyone was familiar enough with the concept by now. But this survey indicates that, clearly, the education is not complete.”

For instance, most funds that are using smart beta strategies are not assessing them against bespoke benchmarks – they are being compared with traditional cap-weighted indices.

Another interesting revelation is that funds are not giving their smart beta managers as much room to underperform as they give they active managers. About 50 per cent said they would reconsider an active manager after about two years if it did not perform to expectations but would reconsider a smart beta manager after just one year.

This is despite the fact that smart beta, by its nature, is a longer-term play dependent on the cycle of whatever factor or factors are being worked in order to gain maximum benefit. Some factors, such as value, can take several years to reward investors, although others, such as carry, have shorter cycles. This has led to the increasing popularity of blending factors into new-style smart beta portfolios.

Finally on this point, investors also said that they were looking to their peers as influencers in the adoption of smart beta. “It looks like they want to see others adopting it first,” Shead said. “There appears to be an element of career risk involved.”

Although the survey results did not separate Australia from the rest of APAC, Shead said that he believed that the understanding of the benefits of smart beta and its adoption by Australian funds was probably higher than in the rest of the region.

On a positive note, funds are changing the way they define and categorise their portfolios. Asset class is still the most common way to classify investments – accounting for about 40 per cent of funds as the “primary” definition – but a significant number also used factor-based and objective-based definitions as a way to look at their portfolios.

“This was unexpected to me,” Shead said. “There’s a sense that the industry is going though ongoing change. While most thought their own funds were going through ‘moderate change’, over half thought that everyone else was likely to go through ‘significant’ change.”

In terms of the key objectives reported in the latest survey, capital growth was the most common, followed by income generation and then ‘generating alpha’.