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Advisers lack confidence in using smart beta strategies, says Columbia Threadneedle survey


The latest strategic beta or smart beta report from Columbia Threadneedle Investments in the US reveals that a survey of 299 advisors conducted in April 2019 found that nearly all advisors (98 per cent) have some level of familiarity with strategic beta investing, but just one-third (36 per cent) feel confident implementing it in client portfolios.

Marc Zeitoun, Head of Strategic Beta and Private Client Advisory arrived at Columbia Threadneedle following the 2016 acquisition of Emerging Global Advisors and a mandate to grow the business in ETFs across the board. The team currently manages USD680 million in ETF assets, and the firm has USD459 billion in assets under management across developed and emerging market equities, fixed income, asset allocation solutions and alternatives.

The smart beta business does not sit separately from the alpha business, as it were, with both sides of the business engaged as part of a collaborative team. “We believe that surveys help us with our product development and education agenda so we are big believers in mining the marketplace to understand what the financial advisers’ preferences are,” he says.

“We believe that who manages the money is a very important thing to know – it needs to be more than just a detail as the portfolio manager is a steward of client capital. We should ask ourselves who is managing the money or developed the rules.”

Zeitoun was surprised by this survey’s finding that less than half of the people could name their portfolio manager on their strategic beta ETFs. Only 18 per cent of advisers can name most or all of the portfolio managers of ETFs they use while 27 per cent of advisers can do the same for the actively managed funds they use in client portfolios.

“Part of my clarion call is to disturb people and say just because it’s passive it doesn’t mean it doesn’t deserve a level of due diligence beyond the price.”

At the outset of building the ETF smart beta solutions at Columbia Threadneedle, Zeitoun and his team went to their active managers. “We said can you distil the essence of the alpha in a number of factors that we could go to the marketplace with in a companion sort of way and they not only did that but agreed to be the portfolio managers on the ETFs themselves. An active portfolio manager on a passive ETF is almost oxymoronic but actually it makes all the sense in the world because it is that team’s insights that have determined how the ETF was constructed.”

Zeitoun comments that ETFs are not complicated instruments but they are varied.

“I know from our European colleagues that smart beta is readily adopted at the institutional level and when you think about what is the institutional process – it’s all about due diligence. We need to push that along the spectrum into wealth management,” he says. “Advisers think price and tracking error are the only two salient points.”

 The survey revealed a large difference between those who are confident in strategic or smart beta and a need for education, Zeitoun believes.

“Where it’s smart beta or strategic beta doesn’t matter, what matters is that advisers understand what the intent of the investment objective is and how that may differ.”

Columbia Threadneedle’s ETF offering in smart beta is where they feel they have a proven expertise in the asset class. “We are not just filling gaps,” Zeitoun says. “We happen to be very strong in multi-sector and fixed income in the US so we have a strategic beta version of that, the Columbia Diversified Fixed Income Allocation ETF (DIAL). We are also very strong in municipal multi sector investing in the US, so we have a strategic beta version in that, the Columbia Multi-Sector Municipal Income ETF (MUST). We have an embarrassment of riches because we are good at lots of things.”

Other findings from the survey were that while few advisers (15 per cent) are talking to clients about strategic beta today, more than half (52 per cent) of advisers familiar with strategic beta plan to use it when constructing client portfolios in the coming year.

Advisors rank enhancing portfolio diversification, incorporating factor-based investments and leveraging active manager insights in a passive product as their top three reasons for planning to use strategic beta in their clients’ portfolios; just 4 per cent said lower fees were the driver for implementation.

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