Despite the recent surge of assets into passive investments, many investors are reluctant to forfeit the pursuit of alpha in the United States, Cerulli Associates reports.
“While many investors have been drawn to the benefits of passive investing (such as lower fees and greater transparency), some are not ready to abandon the alpha potential that active management presents,” states Jennifer Muzerall, associate director at Cerulli. “Others are cognizant of the shortcomings of traditional market-cap-weighted indices. As a result, a new investment concept, known as ‘smart’ or ‘strategic beta,’ has emerged.”
“Strategic beta was developed from a desire to improve returns, reduce risk, and provide uncorrelated diversification to portfolios,” Muzerall explains. “Cerulli defines strategic beta as a group of rules-based strategies that seek better risk-adjusted returns from either selecting or weighting securities on a basis other than market capitalization.”
During the past eight quarters, flows into passive mutual funds have outpaced those of their active mutual fund counterparts. Between January 2014 and February 2016, active mutual funds suffered outflows greater than $110 billion, while passive mutual funds reaped inflows of more than $434 billion during the same period.
“The concept of strategic beta has been around for decades—however, it is only recently that a term has been coined to define this type of investing,” Muzerall continues. “The premise of many strategic beta products is rooted in academic research on how specific factors such as value, momentum, and growth have performed on a historical basis.”