Asian in­vestors turn to smart-beta ex­change-traded funds

The Sun (Malaysia) - - MEDIA & MARKETING -

SIN­GA­PORE: In­vestors in Asia are em­brac­ing smart-beta ex­change-traded funds (ETFs) that can boost prof­its and cut costs in the cur­rent cli­mate of low in­vest­ment re­turns and even lower in­ter­est rates.

Tra­di­tional beta mea­sures the volatil­ity of a se­cu­rity in re­la­tion to the mar­ket. Smart­beta prod­ucts are in­dex funds that in­clude more fac­tors in in­vest­ment de­ci­sions than pure pas­sive strate­gies do, tak­ing into ac­count volatil­ity and mar­ket in­ef­fi­cien­cies to gen­er­ate higher re­turns.

This strat­egy makes smart­beta in­vest­ment a lit­tle more ex­pen­sive to man­age than tra­di­tional in­dex funds, which sim­ply mimic the com­po­si­tion of a bench­mark, but cheaper than ac­tively man­aged prod­ucts.

As­sets un­der man­age­ment in smart-beta ETFs grew 47.5% to US$10.5 bil­lion (RM43.4 bil­lion) in the 12 months through June in the Asia-Pa­cific, ac­cord­ing to Morn­ingstar data. The num­ber of smart-beta ETFs rose to 130 across the re­gion from 97 a year ear­lier, the fig­ures showed.

“In­vestors have re­alised that US in­ter­est rates will not rise fast, and they still need a steady in­come stream,” said David Quah, prod­uct spe­cial­ist at Mi­rae As­set Global In­vest­ments in Hong Kong.

“And this year, in view of the eas­ing in Europe and Ja­pan, it’s dif­fi­cult to get in­come stream from bonds. So in­vestors are turn­ing to high-div­i­dend stocks.”

Mi­rae has seen ris­ing flows into its low-volatil­ity, high­div­i­dend ETF that tracks the Hang Seng High Div­i­dend Yield In­dex, he said. The firm also has nine smart-beta ETFs listed in South Ko­rea em­ploy­ing a num­ber of smart-beta strate­gies.

In a low in­ter­est rate en­vi­ron­ment, ac­tively man­aged funds be­come costly for in­vestors, par­tic­u­larly when they do not out­per­form pas­sive strate­gies.

For in­stance, the av­er­age ex­pense ra­tio for smart-beta ETFs in­vest­ing in Hong Kong equities is 0.67%, ver­sus 1.77% for ac­tively man­aged funds, ac­cord­ing to Morn­ingstar.

Yet, pas­sive strate­gies have, on av­er­age, out­per­formed ac­tive man­age­ment in seven out of 11 mar­kets in Asia, in­clud­ing Hong Kong, over the past three years, Morn­ingstar data shows.

“When the re­turn is 12%, pay­ing 1% is okay,” said Ja­son Hsu, chief ex­ec­u­tive of­fi­cer of Rayliant Global Ad­vis­ers in Hong Kong, which plans to of­fer smart-beta ETFs fo­cused on Chi­nese equities next year. “If the ex­pected re­turn is 6%, pay­ing 1% in ac­tive fees might feel like too sub­stan­tial a cost.”

Aus­tralian pen­sion fund CBUS Su­per be­gan in­vest­ing in smart-beta strate­gies in 2011 for global equities, start­ing at 5% of its world stocks port­fo­lio.

That share, em­ploy­ing value and low-volatil­ity strate­gies, has now risen to 20%, and CBUS may ex­pand smart-beta to do­mes­tic small-cap stocks and emerg­ing mar­kets too, said Brett Chat­field, gen­eral man­ager for pub­lic mar­kets at CBUS.

Smart-beta prod­ucts have proven espe­cially pop­u­lar in Ja­pan, where neg­a­tive in­ter­est rates and a strong yen have weighed on com­pany per­for­mance.

Black­rock’s iShares unit listed two smart-beta prod­ucts in Ja­pan late last year, one fo­cused on min­i­mum volatil­ity and the other on high div­i­dends.

Nikko As­set Man­age­ment listed one high-div­i­dend, lowvolatil­ity smart-beta ETF on the Tokyo Stock Ex­change in De­cem­ber.

“In Ja­pan’s low-in­ter­est en­vi­ron­ment, there is strong de­mand from clients for high div­i­dends,” said Koei Imai, head of Nikko’s ETF Cen­tre.

Ja­pan ac­counted for the big­gest slice of as­sets un­der man­age­ment in smart-beta ETFs, with US$7.3 bil­lion in­vested. Ini­tia­tives from the Gov­ern­ment Pen­sion In­vest­ment Fund and the Bank of Ja­pan to get in­vestors to in­crease their ex­po­sure to ETFs have driven some of th­ese in­flows.

De­spite the growth, the Asi­aPa­cific re­gion ac­counts for just 2% of smart beta as­sets un­der man­age­ment and 12% of the num­ber of smart-beta ETFs, ac­cord­ing to Morn­ingstar. The US ac­counted for 89% of the as­sets and 54% of the to­tal num­ber of prod­ucts. – Reuters

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