MAKING SMART BETA WORK FOR YOU

In the struggle for returns, the question around smart beta is no longer “should we?” but “how do we?” Making decisions about factor selection, timing and other considerations can be challenging.

We hope this information helps illustrate how to put smart beta into practice. And we’re here to help craft a custom solution that fits your needs.
Contact Us now.

Lori Heinel

Senior Managing Director

Deputy Chief Investment Officer & Chief Portfolio Strategist

Selecting Factors

FACTORS: THE ESSENCE OF SMART BETA

Target single factors or multi-factor combinations to meet your portfolio objectives. The selection of a specific smart beta approach will depend on your unique investment objectives.

Smart beta strategies harness the power of factors that active managers commonly seek exposure to, while preserving the benefits of traditional passive approaches.

Value

Value

Value stocks are those that trade at a lower price than their fundamentals (earnings, sales, etc.) would imply. Over the long term, low valuation stocks have outperformed 1 high valuation (expensive) names. 2

Size

Size

Smaller capitalization companies have tended to outperform larger capitalization companies over the long term.1

Volatility

Volatility

Creating a portfolio with lower volatility or tilting towards lower risk stocks can likely generate a higher risk-adjusted return than traditional financial theory would suggest.

Quality

Quality

Out of all the factors, quality has perhaps the clearest economic intuition. It makes sense that higher quality companies are rewarded with better returns over the longer term because they are better at deploying capital and generating wealth.1

Momentum

Momentum

Stocks that have done well recently tend to carry on doing well in the near term. By gaining more exposure to stocks that have done well, you can benefit from the momentum premium.1

1Past performance is not a guarantee of future results.

2 Fama and French, 'Common risk factors in the returns on stock bonds', 1992; Basu, 'Investment Performance of Common Stocks in Relation to their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis', 1977; Rosenberg, Reid and Lanstein, 'Persuasive Evidence of Market Inefficiencies', 1985.

See how economic cycles may impact the performance of select equity factors.

Contact Us for our latest research on how to assess, select and optimise the benefits of your factor exposures.

Hover over market stage to see factor performance. (For illustrative purposes only)

Downturn

(Positive Economic Growth but Slowing)

Value

Volatility

Quality

Size

Momentum

Neutral

Rising

Falling


Rising Significantly

Falling Significantly

Extending to
fixed income

As yields continue to decline and investors move deeper into credit markets to achieve their goals, quality tilted Fixed Income smart beta strategies are gaining in popularity.

Our strategies focus on extracting value/quality factor premia from both sovereign and corporate credit:

Sovereign credit

A combined factor approach that tilts towards higher quality Sovereigns with an embedded volatility trigger to capture market confidence.

Corporate credit

A combined factor approach that tilts towards issuers where the compensation (value) for default risk (quality) is attractive.

Case Studies

SMART BETA IN ACTION

Institutional Investors See the Difference: In our recent survey, 76% of those implementing smart beta reported moderate-to-significant improvement in meeting their long-term aims*.

See how your peers are solving their challenges with smart beta.

Enhance Index Exposure

Case study

CHALLENGE

An investor with a US$2.3 billion portfolio invested in a passive S&P 500 Index strategy wanted to remain passive but achieve better risk-adjusted returns.

SOLUTION

Reduce risk and improve return by mixing passive and smart beta strategies. The investor wished to capture value and low volatility factor premia with its smart beta allocations.

Results

INCREASED HISTORICAL RETURNS,
REDUCED HISTORICAL VOLATILITY

Improve Return Potential

Case study

CHALLENGE

A UK-based defined benefit pension scheme was seeking ways to improve the return potential of their traditional market cap equity portfolio. The investor was cognizant of the current strategy’s limitations and its vulnerability to large exposures to highly-valued sectors and stocks.

SOLUTION

The client chose SSGA’s multi-factor smart beta strategy consisting of value, quality and volatility factors to improve risk-adjusted returns and diversification of its core passive allocation. The client decided this was a more cost-effective and transparent solution that required relatively low governance when compared to a traditional active portfolio.

Read the full case study

Results

COST-EFFICIENT DIVERSIFICATION

Seek Better Outcomes for Matched Portfolios

Case study

CHALLENGE

A US defined benefit fund wanted to improve its fixed income performance relative to liabilities without jeopardizing funding status. The client wanted to extract the quality premium from credit while maintaining duration, yield, rating and maturity of the liability-driven benchmark.

SOLUTION

State Street Global Advisors worked with the client to design a factor-based solution aligned with the investor’s goal of improving return potential while continuing to match assets and liabilities. The approach tilted towards higher quality (measured by default risk), adjusted for value. Ultimately the quality-tilted solution delivered

+

48

BPS

of excess performance (net of advisory fees)

Read the full case study

Results

FUNDING PRESERVED, BETTER RETURNS

Avoid Overdiversifying Active Exposure

Case study

CHALLENGE

A US non-profit with assets invested by a number of active managers asked SSGA to conduct a risk-based analysis of its public equity portfolio to understand the drivers of active return. Portfolios that use multiple active strategies may suffer from over-diversification, with managers’ particular styles cancelling each other out

Our analysis showed:

  • the overall active risk of the aggregate portfolio was low
  • high exposure to volatile equities and negative exposure to value, meaning the portfolio favoured expensive stocks.

SOLUTION

Re-allocate a portion of the active portfolio to smart beta strategies that provide certain desirable factor exposures that may not be reflected in the portfolio of active managers, such as value and low volatility.

Design allows for potentially higher active risk, greater flexibility, more control and simplicity.

Read the full case study

Results

FOCUSED EXPOSURES, REDUCED FEES

Long-term Return Targeting across Market Cycles

Case study

CHALLENGE

As part of a portfolio review, a manager of DC plans sought options to help achieve specific factor exposure to improve returns over the long term.

SOLUTION

Recognizing that market timing is notoriously difficult, we helped build a solution providing exposure to three underlying traditional factors instead of one. Our client appreciates that the multi-factor strategy permits them to take simple factor exposures — the simplicity and transparency of SSGA’s methodology in building the factor was a key attraction. As an early adopter of the multi-factor approach, our client has since expressed interest in pursuing a similar strategy for its Emerging Market equity exposure in partnership with State Street Global Advisors.

Read the full case study

Results

INCREASED HISTORICAL RETURNS,
REDUCED HISTORICAL VOLATILITY

Source: SSGA’s Building Bridges Report, April 2016. *The survey was conducted by the FT Remark and surveyed 400 institutional investors including sovereign wealth funds, pension plans, endowments and foundations, insurance companies and asset managers in December 2015. The survey included a combination of qualitative and quantitative questions and all interviews were conducted by phone. The results were analyzed and collated by FT Remark and all responses are anonymized and presented in aggregate.

Latest thinking

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Our experts are here to help determine the best course of action in line with your specific portfolio objectives and desired outcomes.

Partner with State Street
Global Advisors

Over 20 years of experience managing smart beta portfolios

More than US$86 billion
in smart beta AUM*

Pioneers
in the field of smart beta

*as of 31 March 2016

Our smart beta team

Lori Heinel

Senior Managing Director

Deputy Chief Investment Officer
& Chief Portfolio Strategist

LYNN S. BLAKE

Executive Vice President

CIO, Global Equity
Beta Solutions

JENNIFER BENDER

Managing Director

Director of Research

TAIE WANG

Vice President

Deputy Head of Research
for Smart Beta

Riti Samanta

Managing Director

Senior Portfolio Manager in Fixed
Income, Cash and Currency

David Furey

Vice President

Portfolio Strategist in Fixed
Income, Cash and Currency

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