Posted on 27 Jun 12 by Annie George
Towers Watson’s institutional investment clients have allocated over $15 billion to Smart Beta solutions in the past five years. During this time, the company has partnered with many different asset managers to develop 20 Smart Beta solutions in areas where there were good investment ideas but no desirable investment products, on a net of fees basis.
Craig Baker, global head of investment research at Towers Watson, said: “We are entirely focused on providing our clients the best net-of-fees investment propositions, regardless of whether they are large or small or investing actively or passively. Smart Beta solutions have particularly wide applications for most of our clients, which is why we have worked with many different top asset managers to develop these new solutions. Having the ideas and the relationships in the industry, means we have been able to design much better net-of-fees products for our clients.”
Towers Watson’s Smart Beta solutions cover a range of investment strategies that fall in three main categories: diversity or alternative asset classes; long-term themes; and systematic risk premia capture.
They range from relatively simple ideas such as real estate securities and specialist infrastructure strategies to create liquid diversity to doing existing betas better, such as non-market cap weighted equities. They also include more specialist solutions with niche asset managers, such as reinsurance, currency carry and volatility premia.
Craig Baker said: “Smart Beta is about trying to identify good investment ideas that can be structured better, whether that is improving existing beta opportunities or creating exposures or themes that are implementable in a low cost, systematic way. It is not a substitute for good active management, but it allows resources to be focused on active management in areas where one can’t systematise exposures.”
Towers Watson says that institutional investors should be careful not to pay active management fees to gain an exposure that can be achieved more cheaply or easily elsewhere. It suggests the appeal of using Smart Beta solutions, as witnessed by the overall size of its clients’ allocations, is that it allows greater cost management within a fund without sacrificing diversity and return expectations.
Craig Baker said: “Smart Beta is an area of high innovation that will continue to grow and benefit our clients for many years to come. Asset owners are quite rightly far less tolerant of paying for beta wrapped up as alpha, and the norm will become to split them and pay accordingly. However, with any trend there is always the potential for a bandwagon effect and investors need to maintain vigilance around price and proposition.”
Towers Watson Investment
Towers Watson Investment is focused on creating financial value for the world’s leading institutional investors through its expertise in risk assessment, strategic asset allocation and investment manager selection. It is a division of Towers Watson’s Risk and Financial Services business, has over 700 associates worldwide and assets under advisory of over US$2 trillion.