Investment solutions with multi-factor strategies are gaining popularity among smart beta investors. So much so that from Cerulli Associates, consulting firm, point out that in the long term more products of this type will be necessary.
According to its latest report on investment products, entitled The Cerulli Edge – European Monthly Product Trends, this type of strategy is changing the point of view of many smart beta investors who were disappointed by the bad behavior of some of the strategies by factors. For example, the low volatility strategy had a lower performance by about 550 basis points in 2017, compared to the stellar performance of 21.9% of the MSCI USA index.
“The real and perceived failure of the single factor strategies is such that suppliers are under pressure to improve their products and performance, which is why they have chosen to offer a smart beta version of more sophisticated multifactor strategies,” says André Schnurrenberger, CEO of Europe in Cerulli.
During this period, Bradesco, an important commercial and retail bank, and Duratex, producer of industrialized wood panels and sanitary equipment, have been two of the most profitable companies. During the last three years, the strategy has benefited greatly from the strength of these two Brazilian titles.
Cerulli cites a number of companies that defend multifactor strategies but cautions that for many potential investors, the biggest deterrent is the complexity and “black box” nature of the products. “Cerulli’s studies show that consultants find that smart beta strategies are difficult to understand. If the consultants find it difficult, the average client will find it even less attractive, “says Schnurrenberger.
In his opinion, managers must prepare themselves for the challenge of presenting and launching strategies that use several factors. According to Schnurrenberger, “some funds will not survive, as evidenced by BlackRock’s recent series of smart beta closures.”