Towers Watson has published a research paper, “Understanding Smart Beta”, which looks at the use of smart beta to give exposure to a wide range of assets at low cost.
Smart beta can provide a relatively simple, low-cost and systematic method of gaining exposure to asset classes which can be expensive, difficult to access or illiquid in nature. The paper looks at the use of smart beta to get exposure to commodities, infrastructure, foreign currency and reinsurance markets. Towers said smart beta exists on the spectrum between bulk beta – or market returns from mainstream asset classes, and alpha (returns due to skill in the choice of smart beta, skill in active management, alternatives or tactical asset allocation). It added that interest in smart beta has grown with the realisation that traditional indices, particularly for fixed income, can be flawed, and smart beta can tackle inefficiencies in conventional indices. Another driver for smart beta in alternatives is the realisation that some hedge fund strategies can be reproduced in a simple, accessible way at lower costs.
Towers Watson said that it has seen some large and prominent investors adding smart beta strategies into their portfolios and its clients now have over $20 billion of assets invested in smart beta strategies, mainly in fixed income smart beta. It said that its clients have added 65 new smart beta strategies to their portfolios in 2012.