Push Into Smart Beta Has Paid Off for Institutional Investors

Estimates from a Sharpe model imply that their outperformance comes from greater nuance in factor exposures, or “smart beta” investing.

By Rebecca Moore | December 28, 2016
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Using a dataset of $17 trillion of assets under management, researchers document that actively managed institutional accounts outperformed strategy benchmarks by 86 (42) basis points gross (net) during 2000 to 2012.

In return, asset managers collected $162 billion in fees per year for managing 29% of worldwide capital. Estimates from a Sharpe model imply that their outperformance comes from greater nuance in factor exposures (smart beta).

Joseph Gerakos, from the Tuck School of Business at Dartmouth College; Adair Morse, from the University of California, Berkeley; and Juhani T. Linnainmaa, from the University of Southern California Marshall School of Business, obtained data for the 2000 to 2012 period from a global consultant that advises pension funds, endowments, and other institutional investors on the allocation of capital to asset managers.

In asset manager language, they explored the importance of smart beta or tactical factor allocations. They explain that the words smart and tactical refer to tilting portfolios toward toward better-performing factors. Their estimates tie positive performance directly to smart beta investing. They document that institutional asset managers outperformed strategy benchmarks by 42 basis points net of $162 billion in annual fees and that smart beta investing entirely explained this outperformance.

Researcher suggest that because the unit of observation in institution-level studies includes both delegated and non-delegated capital, an implication of the results is that non-delegated institutional capital likely underperforms delegated institutional capital. Furthermore, there are differences in asset classes covered. Most institution-level studies focus on the U.S. public equity asset class. In these results, U.S. public equities have the lowest positive alpha relative to strategy benchmarks.

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