Superannuation funds will make a big shift into low-volatility smart-beta products over the next 12 months, according to Fraser Murray, head of equities at Frontier Advisors.
Speaking at a packed Investment Management Consultant Association (IMCA) seminar in Sydney, Murray told how there had been little activity in this space until now, but this was about to change.
“This fits what super funds are looking for. There is a greater desire for smoother returns, especially when markets are down. Low volatility [smart beta] is a little bit more resilient in down markets.”
This resilience is wanted by funds for new retirement products and Murray contrasted this usefulness with other alternative-indexing approaches. “Clients actually want this product because it fits their needs,” he said.
Frontier Advisors’ research shows the product back-tests well, delivering higher returns and lower volatility than cap-weighted over 23 years.
Murray added that the fund managers most likely to be chosen are those that deployed a quantitative analysis, had low fees and the longest track records.
“The managers who will find it difficult in this space are the ones with newer products. A long track record is a distinct advantage as much is learnt from managing live portfolios. The products with their wonderful back-tests are going to struggle in that respect.”
Super fund demand is largely in global equities where the strategy has a greater universe of stocks to make the strategy effective.
Janice Sengupta, chief investment officer at Aon Master Trust, who presented research from the Cass Business School in London at the event, warned that such indices would have periods of extreme underperformance compared to market-cap indices, particularly in boom markets and that clients should be fully cognisant of this.
Jeremy Baskin, global chief executive of AXA Rosenberg and one of the biggest promoters of a low-volatility smart-beta approach, was in Australia the same week as the IMCA seminar.
He concurred with Murray that Australian funds were showing most interest in employing smart-beta products for post-retirement portfolios.
“The interest has been particularly keen in post-retirement where there is less sensitivity to tracking error in place of a stable, less volatile return.”
His firm’s approach is to conduct a quantitative analysis of stocks and to favour those with robust earnings that will weather market downturns better.
“The risky stocks with high volatility are avoided as they historically have low returns,” he said.