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Smart beta: a new approach to performance and risk

 

The rapid expansion of smart beta strategies

The asset management business now has to rapidly evolve in order to meet investors’ needs. An asset allocation based solely on a macroeconomic view and a breakdown by asset class, region or sector is no longer sufficient for investors. They seek real risk diversification and as such are increasingly looking for exposure to specific risk and performance factors, often called smart beta factors. In recent years, the development of smart beta strategies has rapidly spread in the equity universe and is now gaining in popularity in other asset classes such as corporate bonds or commodities. This is no longer a mere trend, but a new investment approach.

What are the main factors to be exploited?

Factor-based strategies can assume widely varying forms. THEAM has decided to focus on the factors that have received the most backing from academic research and that have been identified as the most stable in the long term, irrespective of the geographical universe considered.

THEAM’s smart beta range aims to capitalise on four categories of factors:

- Low risk: this involves exploiting the low volatility anomaly (tendency of the least volatile securities to outperform over a long period);

- Value/carry: the valuation and/or return are used as an investment criterion in order to buy cheaply;

- Profitability/quality: this category of strategies favours the securities of companies that exhibit a profitable business model;

- Momentum: securities that have recently outperformed will be given priority and losers ruled out in order to take a position on the major market trends.

Innovation: THEAM’s real added value

The development of THEAM’s smart beta range owes nothing to chance and is based on extensive expertise and a sound quantitative management culture.

Together with BNP Paribas Investment Partners, THEAM has carried out revolutionary research work relating to the most pertinent factors to be used and the optimum manner of combining them, in order to be able to propose multi-factor allocations. The proximity of the research teams and THEAM’s managers constitutes a crucial advantage for transforming fundamental research into real added value. THEAM’s teams are therefore considered to be pioneers in the development of smart beta solutions in various investment universes and market segments. THEAM’s teams regularly publish research articles in renowned academic journals.

THEAM currently offers a wide range of factor-based investment solutions encompassing more than EUR 5 billion of assets under management. A flexible operating method and substantial research capacity enable the development of customised solutions. The THEAM strategies must and are able to adapt to the specific needs of each investor, in order to appropriately supplement the investor’s overall investment approach.

What is smart beta?

Smart beta (also known under other names such as “factor-based investing”, “advanced beta” or “enhanced beta”) strategies aim to improve a portfolio’s risk/return profile over the long term.

To do this, a smart beta strategy will allocate a weighting to each security in its investment universe based on one or several pre-defined specific factors (volatility or the dividend level, for example), rather than the usual weighting by market capitalisation used by the major traditional indices.

The choice of these factors is generally related to the discovery of a specific premium – sometimes called “anomaly” – through academic research. The existence and persistence in the financial markets of these “market anomalies” may have different sources: they may involve biases observed on a long-term basis among investors (contribution of behavioural finance) or more technical causes, related to the actual structure of the markets.

The fundamentals of THEAM’s smart beta approach

THEAM’s range is underpinned by three fundamental characteristics.

A SYSTEMATIC 100% ACTIVE MANAGEMENT OFFERING...

This is the most appropriate approach in order to best exploit the behavioural biases that constitute the main source of the majority of the anomalies. This approach also makes it possible to work on vast and diversified investment universes, thereby maximising the scope of opportunities. A fully modelled management process also offers total transparency throughout the investment process and the possibility of carrying out performance simulations (ex-ante) or detailed performance attributions (ex-post). Finally, this type of strategy is available at a competitive price in relation to traditional active management approaches.

… BASED ON FINANCIAL RESEARCH…

A smart beta strategy must be based on the identification and proper understanding of real and recurring alpha sources. It involves avoiding a short-term approach and capitalising on sometimes excessive financial market reactions.

… AND "RISK-ORIENTED" RESEARCH

The robustness and stability of the investment process are key points of the strategies developed by THEAM.

Smart Beta

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Investments in the aforementioned fund are subject to market fluctuation and risks inherent in investing in securities. The value of investments and the revenue they generate can increase or decrease and it is possible that investors will not recover their initial investment. Source: BNP Paribas Investment Partners.