Smart Beta’s Big Threat to Active Management

Smart Beta’s Big Threat to Active Management

The rise of strategic beta investment products is a threat to active asset managers who are not participating in the space, according to a new Cerulli Associates analysis. Strategic beta products are capturing a lot of the assets going into passive investments as well as investors looking for lower-cost products.

When you look at managers who have predominantly offered these type of strategic beta, “they’ve been more passive-like managers who are looking to offer a premium product above purely passive strategies,” said Jennifer Muzerall, associate director at Cerulli. “So as more managers develop these products, it continues to become a threat on active managers who are not necessarily participating in the space because more flows are going to passive products.”

Instead of weighting companies in underlying indexes by market capitalization (like most ETFs), strategic beta, or smart beta, products either weight companies using rules-based criteria such as cash flow or targeted volatility levels, or equally weight them. In this way, strategic beta ETFs combine elements of actively managed mutual funds with the lower fees and transparency associated with ETFs.

“As you see more investors flock to lower-cost products, it’s more of a threat to active managers who have higher-fee products,” Muzerall said.

But many active managers are moving into the space; half of those surveyed by Cerulli who do not have a strategic beta offering are planning to launch a product in the next year or two. Another one-quarter of managers have plans to bring a product to market in the next 6 to 12 months.

“Active asset managers are begrudgingly moving into strategic beta because they continue to see outflows from active products,” Muzerall said. “While new money may feed strategic beta products, asset managers express concerns that offering strategic beta may cannibalize assets from existing active products.

The study also found that RIAs are the biggest adopters of strategic beta. According to asset managers surveyed, on average 35 percent of their strategic beta products are allocated to RIAs. Muzerall believes it’s because these advisors are more autonomous.

“They don’t have to follow home-office recommendation lists, or pick products through a home-office model or managed account platforms,” she said. 

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