Mismatch in smart beta interest and implementation: AXA IM

An AXA Investment Managers survey has found that the majority of institutional investors believe smart beta is a sensible approach to beta harvesting and a viable alternative to more traditional passive funds — however the take-up of smart beta strategies has been a bit slower to catch on.

AXA IM's survey of over 90 institutional investors found 85 per cent of local investors viewed smart beta as a viable replacement for traditional passive index or core active equity funds. However only 33 per cent of investors and consultants currently allocated money to smart beta equity strategies and 17 per cent to smart beta bonds strategies.

AXA IM director of Australia and New Zealand Craig Hurt said with the introduction of MySuper legislation this July, Australian super funds would be required to offer a low-cost, transparent default option in its MySuper offering.

Hurt said investors were facing a period of more subdued return expectations, which would put increasing pressure on fees.

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"Our concern is that in time, this shift will see investors potentially exposed to market bubbles," he said."

AXA IM head of institutional client strategy Tim Gardener said allocations to smart beta were likely to increase as global investors became more aware of the shortcomings of traditional indices.

"For years prior to the global financial crisis, investors were generally comfortable tracking indices despite their flaws, and no real long-term harm was caused," he said.

"The decade facing us will be a period of change and uncertainty, and in our view there are real dangers in blindly tracking indices based on the past."

AXA IM said rather than a "clever index", a series of sensible, transparent, pragmatic and low-cost strategies could better address the limitations of market cap indices and alternative indices — such as under-compensated risk, poor diversification and transaction cost leakage.