Consultants have also been won over by such evidence.
Jo Sharples, senior investment consultant at Aon Hewitt, says the approach is right for a client who values good investment ideas and is prepared to change to improve outcomes even if it means a little extra in fees and in governance time. She describes a client who moved a wholly passive equity strategy into one third value and minimum volatility and two-thirds market cap for these reasons.
At their extreme, factor-based approaches are being used to tailor defaults that target a specific income replacement ratio for a specific fee budget.
In this way, SEI master trust identifies factors to create tailored defaults and decides if passive, smart beta or active is the best or the most cost effective way of accessing each factor.
Ashish Kapur, director, solutions – institutional group at SEI, says: “We will get to that replacement ratio which we have agreed with the client with the least cost and a specified level of volatility.”
SEI relies on $260bn size to achieve this, but it is an approach that works best for those clients that have the scale to afford it.
CRITICS
Whenever a big marketing push occurs in pensions, it is natural for sceptics to ask who is really benefiting, particularly if the push comes from fund managers and consultants.
Richard Butcher, managing director of independent trustee firm PTL, is wary of what he sees as a concerted marketing push for “lazy alpha”. He is also not comfortable with something that feels like a compromise between passive and active. Above all he points out that none of the DC funds he looks after are using it.
Paul Macro, a director of Isinglass, notes the focus on using smart beta arises from the overwhelming move to cut investment costs rather than administration or consulting costs in response to the 75 basis points (bps) charge cap. He sees fees for administration of £50 per head a year and consultant fees of £500-£600 an hour as areas that arguably need cutting first.
He adds that new regulation requiring a chair of trustees to quantify how they are getting value for money could be another unintended trigger for funds to cut active management and switch to alternative indexation.
