Australia

Smart beta strategy outperforms in 2013, says BetaShares

Performance figures for 2013 show a smart beta index beat out both Australia’s main market-cap weighted index, and many active fund managers, on a total return basis, according to ETF provider BetaShares.

In what was a standout year for active funds, the median manager returned 23.2% over the 2013 calendar year, according to Mercer’s Investment Performance Survey, compared to the 20.2% return achieved by the main benchmark index, the S&P/ASX 200.

Eclipsing both was the FTSE RAFI Australia 200 Index, which returned 25.5% over the calendar year 2013. This performance is supportive of the longer-term performance of this index, which has outperformed the S&P/ASX 200 in 15 out of the last 20 years.

The Index is a “Fundamental Index” which is designed to provide investors with exposure to the top 200 companies listed on the ASX, weighted in a way that is reflective of their economic footprint rather than simply their market capitalisation.

The Index has been built using the RAFI Fundamental Index methodology, which aims to produce superior long term performance compared to traditional market cap weighted indices. It seeks to do this by improving on some of the limitations of market capitalisation based methodologies, while still maintaining the benefits of passive investment (lower turnover costs, broad economic representation and a transparent, rules-based process).

Rather than simply using market capitalisation of companies in order to weight constituents, which may often result in investors being overweight relatively expensive stocks and underweight relatively inexpensive stocks, the RAFI Fundamental Index approach uses four fundamental measures of company size to determine index weights. These four factors are cash dividends, sales, cash flow and book value.

Alex Vynokur, Managing Director of says the RAFI smart beta strategies have a compelling track record, having shown outperformance versus equivalent market capitalisation indices as well as a large proportion of active fund managers, in many developed and emerging markets, over a number of years.

“We were encouraged to see that even with strong performance of many active fund managers compared to the S&P/ASX 200, the RAFI methodology outperformed both the S&P/ASX 200 and many active managers during 2013, and is available to all investors at a fraction of the fees charged by most active funds,” says Vynokur. “Smart beta strategies such as the FTSE RAFI Australia 200 are becoming more mainstream, with BetaShares launching our first exchange traded product of this class during 2013. According to the recent Towers Watson data, institutional investors made over twice as many new investments in smart beta strategies during 2013 compared to the year before, with a total of over $32 billion invested in smart beta strategies globally. We expect Australian investors and their advisers will continue to adopt smart beta due to its intelligent approach, performance potential compared to traditional indices and relatively low costs compared to active managers.”

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