Is smart beta smart?

You can rarely open a financial newspaper or website without seeing the buzzwords ‘smart beta’.

Smart beta investing offers clients the benefits of both active and passive investing. These funds aim to achieve benchmark-outperforming returns at lower fees than what is associated with traditional equity portfolios.

This is achieved by following a rules-based process to identify shares that are likely to outperform due to having trending, value or quality attributes.

History shows that smart beta investment styles outperform the market over a cycle, but that within a cycle there would be periods of underperformance.

The challenge is to stick religiously to the process during these periods, as a style that disappointed often unexpectedly and dramatically gets back into play and one does not want to miss out on these events.

We offer three smart beta products: the Momentum Trending Equity, Momentum Value Equity and Momentum Quality Equity Funds.

Our trending strategy is based on the phenomenon that investments that have performed well tend to continue to perform well and investments that have performed poorly often continue to perform poorly. The dynamics behind this strategy can be explained by herd behaviour. As new information becomes available, some market participants take the lead and start buying or selling. As time progresses more and more investors follow the leaders and cause a share price trend that can be exploited.

The roots of value investing are found in the well-known truism ‘buy low and sell high’. Our value strategy works thanks to the concept of mean reversion. Share prices sometimes move away from fair value due to sentiment or normal cyclical behaviour, and eventually again move towards fair value, realising opportunities for value investors.

The quality strategy involves buying shares in companies that are both profitable and stable. This means that they should be able to deliver sustainable earnings growth and over time share prices would follow.

What sets our smart beta offering apart is the distinct investment styles that we follow. This allows diversification over a combination of smart beta factors. As trending, value and quality strategies often outperform at different points in time, we encourage investors to diversify over multiple styles. This would reduce short-term volatility while investors would still be able to participate in the attractive medium to long-term performance that these funds offer.

The Momentum Value Equity and Momentum Trending Equity funds, which use the single-factor components, as well as the Momentum Core Equity Fund, which follows a multi-factor approach by blending individual factors, all have pleasing five-year return histories. Please click here to view more details on these funds and their performance track records and to listen to our smart beta podcast you may click here.

Momentum Collective Investments (RF) (Pty) Ltd (the “Manager”), registration number 1987/004287/07, is authorised in terms of the Collective Investment Schemes Control Act, No 45 of 2002 to administer Collective Investment Schemes (CIS) in Securities. The Manager is the manager of the Momentum Collective Investments Scheme. Standard Bank of South Africa Limited, registration number 1962/000738/06, is the trustee of the scheme. CIS’s are generally medium to long-term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. The terms and conditions, a schedule of fees, charges and maximum commissions, and additional risks are available on the minimum disclosure document (MDD) and quarterly investor report (QIR) for each portfolio which is available on www.momentuminv.co.za. All performance figures are net of fees and represents the A class in each portfolio.