SMART BETA EXPLAINED: INTRODUCTION TO SMART BETA

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

The toolkit for investors has grown to include new products, such as smart beta ETFs. But what is “smart beta”?

We all need to achieve our financial goals, but investing can be challenging. The good news is that the toolkit of investment strategies is evolving, along with our understanding of how markets work. Today, with increased technological advances and the proliferation of index investing, we are seeing a new wave of products come to the fore: smart beta strategies.

How do smart beta strategies work?

… By targeting “factors”

  • Factors are defined as broad and historically persistent drivers of returns, and are present in every portfolio. Investors already have an exposure to factors, whether they know it or not.1
  • The concept of factors is not new. Academic research since the 1930s has systematically identified factors as a driver of returns within and across asset classes, as well as across markets and countries.2
  • There are many different kinds of factors, the most well-known being value investing (favouring stocks that appear underpriced relative to their fundamentals), an investment style that many portfolio managers have been targeting for decades.
  • For decades, leading institutional investors and active fund managers have targeted factors in order to seek excess returns and to manage excess sources of risk in a portfolio. Smart beta strategies now democratize these time-tested sources of returns by allowing investors to target these factors.

1. Source: MSCI, https://www.msci.com/www/blog-posts/what-is-factor-investing-/0165572817

2. Published research showing the historical outperformance of these factors includes: – J. Bender, R. Briand, D. Melas, R, A. Subramanian, "Foundations of Factor Investing." MSCI, December 2013 – Value: J. Lakonishok, A. Shleifer, R. Vishny, “Contrarian
Investment, Extrapolation, and Risk.” Journal of Finance, 1994. – Momentum: N. Jegadeesh and S. Titman, “Returns to Buying Winners
and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 1993. – Quality: R. Sloan, “Do Stock Prices Fully Reflect
Information in Accruals and Cash Flows About Future Earnings.” Accounting Review, 1996. – Low volatility: R. Clarke, H. Silva and S. Thorley, ”Minimum-Variance Portfolios in the U. S. Equity Market,” Journal of Portfolio Management, 2006.

There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics ("factors"). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

How to access smart beta strategies?

Today, factor investing has been made accessible by smart beta strategies. Smart beta strategies typically seek to capture factor exposures using a systematic, rules-based approach using publically available index data. Smart beta strategies are available in a variety of investment vehicles, including mutual funds and ETFs.

Why use smart beta in a portfolio?

Traditional active and index funds can help investors to achieve their financial goals, but they don’t have to be the only solutions. Smart beta strategies can be implemented alongside traditional building blacks to pursue a variety of investment outcomes.

In this series, we seek to address key questions faced by investors when they come to implement smart beta strategies within their portfolio, including:

  • What are the different types of smart beta strategies available and what outcomes can they potentially help to achieve?
  • How are peers implementing smart beta strategies within their portfolios?
  • What due diligence is required to begin implementing smart beta?

Key risks:
Investment risk is concentrated in specific sectors, countries, currencies or companies. This means the Fund is more sensitive to any localised economic, market, political or regulatory events.

Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Share Class to financial loss.

Currency Risk: The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.

Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.

The value of equities and equity-related securities can be affected by daily stock market movements. Other influential factors include political, economic news, company earnings and significant corporate events.

The value of equities and equity-related securities can be affected by daily stock market movements, political factors, economic news, company earnings and significant corporate events.

The benchmark index’s ESG rating assessment of an issuer’s performance is intended to be relative to the standards of the issuer’s industry peers. Investors should therefore make a personal ethical assessment of the benchmark index’s ESG screening prior to investing in the Fund. Such ESG screening may adversely affect the value of the Fund’s investments compared to a fund without such screening.

Factor Focus Risk: Indices with a factor focus are less diversified than their parent index because they have predominant exposure to a single factor rather than the multiple factor exposure of most indices. Therefore they will be more exposed to factor related market movements. Investors should consider this fund as part of a broader investment strategy.

Indices with a factor focus are less diversified than their parent index meaning they are more sensitive to factor related market movements. Investors should consider this fund as part of a broader investment strategy

Index Methodology Risk: Although the Benchmark Index was created to select securities within the Parent Index for their recent price increases on the assumption that such increases will continue, there is no guarantee this objective will be achieved.

Index Methodology Risk: Although the Index was created to select securities within the Parent Index which have a relatively higher exposure to four investment style factors, there is no guarantee this objective will be achieved.

Index Methodology Risk: Although the Benchmark Index aims to seek exposure to securities with high quality characteristics from within the Parent Index, there is no guarantee that this objective will be achieved.

Although the Benchmark Index aims to seek exposure to good value securities from within the Parent Index, there is no guarantee that this objective will be achieved.

Index Methodology Risk: Although the Benchmark Index aims to seek exposure to securities with low volatility characteristics from within the Parent Index, there is no guarantee that this objective will be achieved.

Liquidity Risk: Lower liquidity means there are insufficient buyers or sellers to allow the Fund to sell or buy investments readily.

Multi-Factor Focus Risk: Indices with a multi-factor focus are less diversified than their parent index because they focus on four investment style factors rather than a broader market exposure. Therefore they will be more exposed to factor related market movements. Investors should consider this Fund as part of a broader investment strategy.

Private equity securities can be affected by daily stock market movements, political and economic news, company earnings and significant corporate events. Private equity companies may involve additional risks including higher levels of borrowing, unclear distribution of risk and losses within the private equity structure and constraints on buying and selling underlying investments quickly.

Shares in smaller companies typically trade in less volume and experience greater price variations than larger companies.

Volatility risk: The Fund tracks an index comprising securities with lower volatility historically. “Minimum volatility” in the Fund’s name refers to its underlying index exposure and not to its trading price. There is no guarantee that the trading price of its shares on exchanges will have low volatility

There is no guarantee that the Benchmark Index aim to provide exposure to securities with low volatility characteristics from within the Parent will be met. “Minimum volatility” in the Fund’s name refers to its underlying index exposure and not to its trading price, which may ex

There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics ("factors"). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a funds may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

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