PLANADVISER - March/April 2019 - 15

Advisers Unfamiliar With Smart Beta
Embracing factor-based funds could help advisers fine-tune portfolios
CERULLI has published its March issue
of " The Cerulli Edge-U.S. Asset and
Wealth Management Edition, " which,
among other topics, explores the
benefits and drawbacks associated
with strategic beta investing.
At the core, strategic beta or
" smart beta " strategies aim to achieve
enhanced, risk-adjusted returns by
tracking an index based on specific
" A key challenge
for strategic beta
strategies is the
difficulty that
advisers face in
interpreting them. "
rules or preferences. As opposed to
conventional
market-cap-weighted
passive allocations, these funds weigh
securities based on specific factors
such as performance, dividends,
value, volatility and more. In this
sense, smart beta seeks to outperform
passive indices by taking a more
nuanced, active investing approach.
Cerulli says strategic beta products
offer advisers the opportunity to
fine-tune investment exposures.
" However, they require increasing
intellectual capital to select amid
an abundance of options, " says
Daniil Shapiro, associate director at
Cerulli. " A key challenge for strategic
beta strategies is the difficulty that
advisers face in interpreting them. "
Cerulli's
report makes
the case
that the increased expertise needed to
understand smart beta products, and
the pivotal discrepancies in how they
are positioned, hinder product use.
" Cerulli's adviser survey indicates
that only 21% of advisers report using
strategic beta products-a smaller
portion than would be expected, given
Biggest Retirement Fears
30%
Running out
of money
28%
Being unable
to maintain
their lifestyle
the wide availability and product
development focus, " Shapiro says. " It's
likely that the ambiguity about factors
and what they are intended to accomplish
is challenging strategic beta
adoption. "
About a year ago, FTSE Russell
found in its own survey that advisers
were only beginning to embrace
smart beta strategies. At that point,
47% of advisers in the U.S. said they
knew too little about the tactic to see
it as a viable opportunity. While 79%
of U.S. advisers said they were aware
of smart beta, just 36% said they were
very familiar with it.
Cerulli's new reporting suggests
that the same fundamental challenges
to smart beta adoption remain
firmly entrenched.
" In examining how issuers position
strategic beta exchange-traded
funds [ETFs], Cerulli finds that 68%
of issuers often present the products
as providing specific factor exposures,
while 50% state that they position the
TALKING POINTS
Forced to Retire Early
The reasons why people retire earlier
than planned are due to health shocks,
employment shocks, familial shocks and
financial shocks.
Source: Center for Retirement Research at Boston College
18%
Being unable
to meet rising
health care costs
Source: American Institute of CPAs, Personal Financial Planning Trends Survey
ETFs as generating alpha, " Shapiro
says. " Advisers, meanwhile, report
using strategic beta products based on
their desire for key outcomes, particularly
downside risk protection and
reducing portfolio volatility. "
Additional context for the new
Cerulli report was provided by Mike
Hunstad, head of quantitative strategies
for Northern Trust Asset Management.
According
to Hunstad, many types
investors,
of institutional
(DB)
including
defined contribution (DC) and defined
benefit
retirement plans,
first
started to embrace factor-focused
portfolios and smart-beta strategies as
a means of achieving excess returns.
With the latest bouts of market volatility,
there has been something of
a rush into the low-volatility factor,
but other factors are also receiving
increased
client
attention. Many
institutions have found real success
with factor investing and smart beta,
Hunstad suggests. -John Manganaro
planadviser.com March-April 2019 | 15
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