Mo' Better Beta: Consultants See Signs Of Smart-Beta Breakthrough

Recent moves by some large public pension funds have boosted consultants' optimism that smart beta might be ready now to break through as a mainstream strategy. Funds dealing with low return expectations for the foreseeable future are enticed by the potential for smart beta strategies to increase returns while lowering volatility. According to consultants, a confluence of technology, improved strategies and better understanding of how smart beta fits into a portfolio has the sector primed to take off as soon as over the next five years. Some funds may need to upgrade their governance models, however, and smart beta providers still have a couple of hurdles to overcome before they win over reluctant investors. Smart beta is generally defined as a rules-based approach to gain exposure to certain risk factors, such as value or momentum. Once an interesting idea born from academic work, the concept has overcome initial resistance to the point where, according to consultants, most investors are using factors to analyze their portfolios, though widespread adoption of factor-based strategies has lagged.