The Markets February 19, 2014

Towers Watson Clients Double Smart Beta Asset Flows

Institutional investors working with Towers Watson more than doubled asset flows moving into “smart beta” strategies last year, reaching $11 billion of inflows in 2013.
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Smart beta strategies don’t have a precise definition, but the term generally refers to investment programs that take advantage of both active and passive investing principals. Generally, a smart beta portfolio uses rules-based investment strategies that do not rely on traditional market-capitalization weighting to set asset allocations within an index-tracking portfolio.

Historically, smart beta strategies weighted a portfolio’s asset allocations by the security issuer’s revenues, earnings or gross domestic product, among other rules. Popular strategies today include equal weighting, fundamental weighting and minimum variance weighting.

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Towers Watson says the strong growth in smart beta strategies among its institutional clients is not surprising, as institutions have long been expressing interest in alternative strategies (see “Institutions Like Smart Beta”) that can provide lower fees. Put simply, smart beta assumes that better diversification and rebalancing rules can generate returns that exceed the capitalization-weighted index without expanded risk or excessive oversight. Like indexed investments, smart beta’s most attractive features typically include low management fees, high transparency and low asset turnover, but great diversity exists in the space.

Data released by Towers Watson shows about $1 billion of the $4 billion that clients invested in real estate during 2013 moved through smart beta portfolios, followed by a third of investments made in direct hedge funds, at more than $3 billion. The firm also saw institutional clients put $2 billion into infrastructure-related investments through smart beta investments during 2013.

The $11 billion in total inflows across over 180 portfolios is up more than 100% from the $5 billion placed in smart beta across 130 portfolios in 2012, the firm says. Towers Watson’s clients globally have now allocated over $32 billion to smart beta strategies in almost 500 portfolios, across a range of asset classes.

“It is no surprise that smart beta strategies are being implemented at this rate, given their inherent relevance for most institutional investors,” says Craig Baker, global head of investment research at Towers Watson. “Interestingly, it has taken some time to get to this point, given that we started developing the concept in 2000 as part of our work on structured alpha, then in more detail in 2002, as beta prime.”

Baker says that, while his firm is satisfied that its clients have been able to benefit from a range of smart beta strategies, Towers Watson is concerned about the proliferation of products now on the market that claim to be smart beta, particularly in the equity area.

The data also show that, last year, Towers Watson’s institutional clients—which include pension funds, sovereign wealth funds and insurance companies—carried out alternative asset class selections worth more than four times as much (over $12.5 billion) as they did five years ago.

Among alternatives, real estate attracted the most interest (over $4 billion), where about 25% is in smart beta, followed by direct hedge funds (over $3 billion) and infrastructure (over $2 billion), where about one-third was in smart beta strategies. In the same period, direct private equity attracted approximately $1.5 billion, while illiquid credit (distressed debt and lending) attracted roughly $1 billion in assets, the firm says.

“Throughout the past five years, the alternative fund managers that we have put into client portfolios have shown their ability to adapt to the changing environment to generate good net-of-fees performances,” Baker says.

Baker predicts that larger institutional funds are likely to continue investing in funds directly for most alternative asset classes, rather than via funds of funds. That’s a result of expanding focus on securing better fee structures, greater transparency and the growth of more advanced smart beta options, he says.

“Indeed, there were only three fund of hedge funds mandate selections in 2013, which demonstrates this point,” he says.

According to the data, bond selections by Towers Watson’s clients in 2013 totaled $22 billion, of which the majority were invested in global (approximately $11 billion) and U.S. (roughly $5 billion) mandates, followed by emerging market mandates (about $3 billion). In 2013, the total number of multi-region bond selections exceeded the combined total of all single-region bond mandates, the firm says.

“These figures confirm a longer-term trend of investors seeking greater efficiency, diversification and diversity in bond mandates, for example, favoring global solutions over a home-market bias, and an increasing acceptance of alternative credit asset classes into the strategic asset mix,” says Baker.

In equities, global mandates totaling approximately $10 billion continued to be the most popular with Towers Watson's clients in 2013, followed by U.S. equity (roughly $3 billion), global ex-U.S. equity and U.S. small- and mid-cap equity mandates (each approximately $2 billion). In total, equity mandate selections last year accounted for approximately $24 billion in assets.

In Practice February 19, 2014

Building True Relationships with Participants

Some retirement plan advisers strive to offer complete, holistic advice.
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Group participant meetings continue to be a critical way for most retirement plan advisers to communicate with participants, but some advisers go above and beyond, and use one-on-one meetings to delve deeper into individual participants’ interests, gleaning more than just their retirement goals and 401(k) balances.

For Marilyn Timbers, a financial adviser and retirement coach with ING Financial Partners in Stamford, Connecticut, the objective is to get to know each participant’s “personality and experiences [in order to] be more attuned to their risk tolerance and find solutions that fit them personally. My clients and I discuss more than financial goals,” Timbers says. “I want to know about their dreams, passions, purpose and values.”

Kelly Campbell, CEO of Campbell Wealth Management in Alexandria, Virginia, has an 80/20 rule. At his initial one-on-one meetings with participants, he uses 20% of the time to discuss finances. “The other 80% is spent identifying what’s really important to these folks,” Campbell says. “Is it their children and grandchildren, travel, entrepreneurship or a second or third career? The true beauty about starting a retirement planning discussion with the non-financial aspects is that it creates a partnership and helps establish trust in the client/adviser relationship. It also leads to a responsible financial plan, which will achieve those important things in their retirement lives.”

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Jeff Gitterman, CEO of Gitterman & Associates Wealth Management of Iselin, New Jersey, and New York, starts conversations with retirement plan participants by identifying which of 16 core desires—power, status, curiosity, charity and saving, to name a few—best defines their personality. “In the financial planning process, we want to start off with what someone’s core desires are and what they would like their life to look like,” Gitterman says. “When we center around their desires, we can get a clear picture of what they want their life to look like, and then we give financial advice. Most advisers start with financial advice, rather than their client’s drive.”

More and more plan sponsors seek “top-tier advice,” says Brian Brice, managing director of The Brice Group, a member of the Merrill Lynch Financial Advisory Team based in Bloomfield Hills, Michigan. “In a lot of the mandates we are winning of late, plan sponsors are not only interested in our practice, but in giving their employees access to top-tier advice, in our treating each person individually. We find there is a tremendous amount of value in serving people personally. That extension has really driven our business and given us an opportunity to differentiate ourselves.”

So what areas of participants’ lives beyond their retirement goals do retirement plan advisers discuss? “Their concerns, needs and passions, be it their children and parents, their extended family, mortgages and philanthropic activity,” Brice says. 

Michael Chadwick, CEO of Chadwick Financial Advisors in Unionville, Connecticut, often finds himself helping participants make decisions about where to move, or whether to buy a new or used car.

Advisers who take a holistic approach cover a range of other topics, too: refinancing a mortgage, health care, insurance, long-term care, funding a child’s education, investment opportunities, taxes and estate planning, divorce settlements, volunteering, budgeting and managing debt. For his pension plan clients, often small business owners, Chadwick consults on how to expand their business. “I think sometimes these conversations we have are the most valuable part of the client relationship, because we really help them,” Chadwick says.

The goal, Brice says, is to “exceed expectations. Group meetings are definitely part of the business, but if you roll up your sleeves and do the work, you can achieve more in one-on-one meetings and truly build a relationship.” Not only is the result fulfilling for the participant and for the adviser, but it often leads to private wealth management clients outside the retirement plan, Brice says.

Indeed, a Bank of America Merrill Lynch Workplace Benefits survey of plan participants conducted last June found that many participants would like such guidance; 51% said they would like access to a financial professional, 46% want online tools, and 39% want to be offered financial seminars relevant to their life stage and personal situation. Plan sponsors, too, increasingly value financial advice. Bank of America Merrill Lynch surveyed plan sponsors in December and found that 81% of human resources professionals believe they are at least somewhat responsible for their employees’ financial wellness, and 70% of employers offer employees access to one-on-one advice, up from 56% in 2012.

The bottom line, Brice says, is “when you do the right thing by people, yes, it can lead to opportunities. But those opportunities should be a byproduct of doing the right thing.”

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