Multi-Factor Set to be the New Plain Vanilla in Smart Beta

Multi-Factor Set to be the New Plain Vanilla in Smart Beta
Providers digging deep to achieve incremental returns

June 2018, London. Multi-factor products are taking center stage within smart beta, which needs to raise its game, even if that means greater complexity, according to the latest issue of The Cerulli Edge―European Monthly Product Trends.

Cerulli Associates, a global research and consulting firm, notes that skeptics of smart beta have recently been handed more ammunition by the failure of certain strategies to deliver. For example, the low-volatility strategy typically underperformed by some 550 basis points in 2017, compared to the MSCI USA index’s stellar 21.9% return. Low-volatility’s return has been weaker than the main index for five of the past 10 calendar years. High-dividend strategies are also fraught with issues.

“The failure, real and perceived, of single-factor strategies is such that providers are under pressure to up their game by offering more sophisticated multi-factor smart beta,” says André Schnurrenberger, managing director, Europe at Cerulli.

Cerulli cites a number of firms that are making a strong case for multi-factor, but adds that for many potential investors the biggest deterrent is the complexity and the “black box” nature of the products. “Cerulli studies show that advisors find smart beta difficult to understand. If advisors are struggling, the average client will find it even less appealing. Add in multi-factor, and it gets worse,” says Schnurrenberger. “Multi-factor has merit, but providers need to prepare themselves for the challenge of putting their case. Some funds will not survive, as BlackRock’s recent raft of U.S. smart beta closures shows.”

Other Findings:

  • Europe’s exchange-traded fund (ETF) market suffered its second consecutive month of net outflows in April, with €400 million (US$462 million) exiting, according to the latest available data. Euroland and Europe equities were, with -€1.8 billion and -€0.8 billion respectively, the main drivers of the outflows. However, says Cerulli, ETF providers retain a positive outlook; Goldman Sachs, for example, recently entered the European ETF market.
  • In April, the European fund-of-funds (FoF) market recorded its first net outflows since June 2016. However, notes Cerulli, a more granular view reveals that most of the outflows were driven by BlackRock’s Non-UCITS Retail–Consensus 85 fund, which suffered net outflows of more than €7.9 billion in April. Ex-house assets account for 73% of the total €882 billion FoF industry.

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