She goes on: “If you look at the client adoption, we’ve seen at the beginning asset managers were the main users of these strategies, so then they were just another tool in the toolkit in order to play some investment views.
“Then gradually we started to see the wealth community, especially wealth discretionaries – the most sophisticated part of the wealth management community - opening up to that. But then gradually we’ve seen it becoming more and more a tool relevant to advisers, for example.”
Ms Sperandeo believes the next step is for providers and the industry to do more to help advisers understand how to use smart beta in a client portfolio, particularly now she believes there is enough evidence of what factors tend to work well in certain economic environments.
What is the evidence smart beta investment vehicles outperform actively run funds?
SCM Direct published research in January this year which broadly concludes smart beta funds outperformed their “human counterparts” in 2016.
It reveals the average smart beta ETF outperformed a traditional market cap weighted benchmark by 1.5 per cent.
But SCM Direct, which analysed a sample of 72 sterling denominated LSE-listed smart beta equity ETFs that were available to invest in last year, emphasises the need to be highly selective when it comes to investing in a smart beta ETF, as only 56 per cent of the smart beta ETFs analysed beat a comparable market cap benchmark.
Figure 1: Top 10 within the smart beta ETF sample analysed by SCM Direct.
Alan Miller, chief investment officer at SCM Direct, concludes: “Smart beta ETFs are not a universal cure for underperformance. However, while their charges are significantly higher than a plain vanilla index fund (0.39 per cent versus 0.15 per cent) many follow proven strategies - size, quality, momentum, value - that tend to outperform over the long-term.
“In addition, investors would know what they are getting as the smart beta ETF will stick to its strategy rather than be tempted to panic and change their strategy, often at precisely the worst time – known as ‘style drift’.”
He adds: “Also, as our 72 ETF sample showed in 2016, stockpicking is required to evaluate the timing as to when the valuation and fundamentals associated with the smart beta strategy is most opportune.
“For example, many value-tilted ETFs have benefited in 2016 from the sharp upswing in value stocks across the world post the Trump victory which may not be sustained through 2017.”
One way to avoid being over-exposed to one factor is to combine factors which tend to outperform in different market cycles.
Ms Sperandeo suggests: “If you ask me what I expect to see in terms of advisers’ adoption, these would be the two key trends: how to tilt an existing portfolio toward one factor over the other. For example, value is now a big theme. Value strategies have been out of favour for the past four out of five years. They have been really overlooked.
