Investing

DC Plan Sponsors Curious About Strategic Beta

Cerulli pegs interest in “smart beta” to a heightened focus on fees that has proven to be a boon for passive managers while simultaneously creating a significant headwind for their active counterparts.

By John Manganaro editors@plansponsor.com | October 26, 2016
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Fee pressure is the dominant theme within the defined contribution industry, suggesting active investment managers may begin to focus more on smart-beta indexing over their traditionally preferred approaches to remain competitive.

This is according to the latest issue of The Cerulli Edge – U.S. Monthly Product Trends Edition, which concludes that DC plan advisers and sponsors are increasingly considering strategic beta as an alternative to traditional active management. Cerulli pegs the trend to a heightened focus on fees that has proven to be a boon for passive managers while simultaneously creating a significant headwind for their active counterparts.

Cerulli data illustrates corporate defined contribution (DC) asset owners are adopting use of “strategic” or “smart” beta, with asset managers reporting that, on average, 11% of such products are available for corporate DC plans.

“The majority of product development has occurred within the ETF wrapper, a vehicle not as conducive to the DC space, especially within 401(k) plans,” Cerulli observes. “Asset managers that have strategic beta or are in the midst of developing strategic beta should not overlook the DC market as an area of opportunity to grow assets.”

To clarify an important definition, Cerulli notes that the catch-all terms “smart beta” or “strategic beta” simply refer to rules-based styles of strategic indexing that go beyond the traditional factors of market capitalization, momentum or value to build portfolios that seek to deliver market outperformance and better risk-adjusted returns. Unlike the “alpha” outperformance sought by tactical active managers, the outperformance of smart beta is supposed to come from the design of the index and pre-programmed trading rules.   

According to managers interviewed by Cerulli, concerns about lack of diversification of their market-cap-weighted passive strategies has institutional investors (including pensions and DC plans) thinking more about implementing strategic beta in their portfolios.

“The high cost of active strategies is also driving more institutions to strategic beta,” Cerulli says. “Many institutional investors have a collection of active managers with a neutral or conflicting set of exposures at the plan level. Adding strategic beta through a satellite position allows institutions to tilt plans toward a desired exposure.”

NEXT: Important facts about the smart beta market

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