Investing Insights - Smart Beta Investing

We live in an age of Smart phones and Smart cars - so why not Smart investing? The approach has arrived in main stream money management born out of the debate between passive and active investment strategies. Over the past two decades, billions of dollars from institutional and private investors have flowed into “index” funds which seek to passively track the returns of bond and stock markets. Yet, active managers, partly driven by major downturns like the Tech bubble of 2000 or the 2008 financial crisis, continue to allocate funds to alternating asset classes and styles to provide clients with the optimal mix of risk and rewards against financial market returns. The debate continues, but Smart investing may offer 21st century investors the ultimate combination of efficiency and results.

Most investment managers agree that low turnover of holdings and low fees offered by index investing contribute to clients’ long-term returns. This fundamental principle has been extended as a competitive advantage of passive investing through several studies, which found that the majority of active managers failed to beat index returns, especially after deducting management fees. This evidence sparked the movement of both institutional and private capital to indexed investments, as a core solution to simplify the investment selection process and maximize returns, essentially through cost reductions.

Yet, as fund flows into passive strategies peaked, certain factors favoring active managers were re-evaluated, as most equity markets provided range bound returns for many years after 9-11, while experiencing price volatility of seismic proportions through the 2008 financial crisis. Renewed studies showed that managers in certain segments of the market, such as small capitalization stocks, value stocks and momentum stocks consistently provided real, added value returns versus the markets. In addition, the examination of “objective” market indices based on market capitalizations of the underlying stocks, often reveals a set of investment rules just as complex as the discipline of an active manager. If investors are forced to undertake the same due diligence measures for a passive investment, where is the benefit?

Fortunately, the investment industry has undergone the same revolution in computer processing power and the ability to manipulate large amounts of information as in other areas of society. Managers have adopted the term Smart Beta to reflect the ongoing hunt for returns maximized against the prevailing risks in financial markets. Taking the best of both worlds, managers focus on return bearing factors such as small capitalization stocks, while packaging these holdings in a consistent fund portfolio which is transparent and readily accessible to investors at a low cost.

Northland Wealth Management has been an early evaluator and adopter of Smart Beta strategies; implementing a Low Volatility stock approach in our portfolios.

This strategy matches the investment profile of our core clientele and has provided above average returns though historic market fluctuations. Along with access to select alternative investment holdings, we continue to make investing smarter, not harder.