Wealth managers are among those calling for more smart beta-style investment offerings, a prominent player in the field says.

There is plenty of creative brainpower driving innovation in the asset management market, at least if the proliferation of market indices and associated funds and products playing to what is called the “smart beta” approach is a guide.

A common definition of a smart beta approach is that it replicates a style of investing to obtain returns associated with a particular strategy without the cost of active management. These are rules-based investment strategies that don’t depend on market capitalisation. One segment of all this activity is the market for exchange traded funds and products, enabling investors to tap into a particular style or investment approach by simply buying shares in a listed ETF, for example.

A prominent player in this field and constantly pushing the boundaries of new ideas about investment styles and new ways to capture returns is Lyxor, the asset management arm of French bank Societe Generale. Lyxor, as part of a partnership with JP Morgan, recently listed on the German Xetra market some five ETFs that capture separate risk factors in markets. (These five funds each carry a total expense ratio of 0.3 per cent.)

Clients using Lyxor’s range of smart beta products range from sophisticated institutional investors well versed in the terminology to those at the retail end of the spectrum, Chanchal Samadder, head of UK institutional ETF sales at Lyxor, told this publication recently.

“There are other ways to create market indices than simply by those that are capital weighted,” he said. “They are deliberately trying to create a portfolio of stocks with the objective of delivering a different type of return and to ultimately outperform a standard market capitalisation index over the long term."

The trend of what is called smart beta, or factor investing, has arisen relatively quickly. A report by Bloomberg in March this year stated that in the US alone, such funds held around $400 billion of assets, up from zero in 2000 – a vertiginous ascent over 15 years – and that figure is almost certainly higher today. The report went on to note that Finra, a US financial regulator, is scrutinising the sector to make sure these funds pass muster, given concerns that some of them might be little more than marketing ploys. In Europe, there are €10.4 billion of assets in smart beta funds (source: IPE.com). In December last year, Invesco PowerShares, the exchange traded funds provider that is part of Invesco, claimed demand for smart beta indices across Europe was growing and set to accelerate further, casting light on innovation in how investors try and capture returns.

Lyxor says risk factors help explain systematic return patterns in equity markets and offer a new and diversifying allocation framework. Risk factors can relate to fields such as value, quality, low beta and momentum. There are, for example, different types of risk factors observed in the investment world and Lyxor attempts to unbundle these into separate streams of return, Samadder continued.

This approach is not unique to Lyxor, although the firm understandably likes to see itself as an innovator here. For years, large pension funds in the Nordics, North America and elsewhere have looked at ways to capture very specific forms of risk factors to obtain returns but the idea has gone more mainstream, taking on a rules-driven, transparent approach.

“The client, under the new approach, knows exactly what a portfolio is doing on a daily basis and unlike a purely discretionary fund there will not be any style drift, such as from a value to a growth style,” Samadder said.

Some of the pressure for more focus on specific areas of risk is coming from the wealth management community, he said. “The interest in this has been driven by the larger private banks and some fund managers, in the main. We have some discretionary wealth managers interested as well,” he said.

Cost, needless to say in a time when investors want to protect gains from being eroded by fees, is an important cause of the smart beta trend more generally. Sometimes firms want to use these indices as a lower-cost alternative to direct active management. The use of funds tracking smart beta indices is also a flexible and efficient way for an investor to get exposure to a variety of investment styles and return sources, Samadder added.

Almost every day, this publication receives details of new smart beta funds and ideas hitting the markets. What seems certain is that Lyxor intends to remain one of the most prominent players in the field.