A growing understanding of how smart beta works is exposing the way some managers are charging high fees for the same product and labeling it as active, claims Towers Watson.

The remarks were made in a presentation to leading institutional investors at the Conexus Financial Fiduciary Investors Symposium in the Blue Mountains, by Hugh Dougherty, a senior adviser and head of manager research at the asset consultant firm.

He said research showed some “active” fund managers offered a strategy that made smart moves around an index that replicated what other managers were offering for a smaller fee in smart beta mandates.

Dougherty warned that while such revelations would make smart beta attractive to investors, there was little depth in the number of managers offering it and that if the strategy grew more popular it could lead to the failure of some approaches as stocks become overbought.

This, he said, meant buyers should beware that the strategy might not always be sustainable.

He revealed that in 2012, smart beta manager searches constituted 7 per cent of Towers Watson’s total global search activity and that it carried out 12 manager searches for Australian clients last year.

While smart beta had been most popular in fixed income, he added that there was a growing trend for it to be used in equity mandates.

The theme was picked up at the symposium by State Street, which revealed it is running $5 billion in smart beta mandates in Australia, with $2 billion of that being awarded in the last 18 months.

Meanwhile, in a separate discussion on the asset management structures at AustralianSuper, Peter Curtis, head of investment operations, said that as part of a goal to bring 30 to 40 per cent of fund management in house, steps would be taken to run more active mandates in house on a smart-beta basis.


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