SINGAPORE Oct 3 Investors in Asia are embracing
smart-beta exchange-traded funds that can boost profits and cut
costs in the current climate of low investment returns and even
lower interest rates.
Traditional beta measures the volatility of a security in
relation to the market. Smart-beta products are index funds that
include more factors in investment decisions than pure passive
strategies do, taking into account volatility and market
inefficiencies to generate higher returns.
This strategy makes smart-beta investment a little more
expensive to manage than traditional index funds, which simply
mimic the composition of a benchmark, but cheaper than actively
Assets under management in smart-beta ETFs grew 47.5 percent
to $10.5 billion in the 12 months through June in the
Asia-Pacific, according to Morningstar data. The number of
smart-beta ETFs rose to 130 across the region from 97 a year
earlier, the figures showed.
"Investors have realized that U.S. interest rates will not
rise fast, and they still need a steady income stream," said
David Quah, product specialist at Mirae Asset Global Investments
in Hong Kong.
"And this year, in view of the easing in Europe and Japan,
it's difficult to get income stream from bonds. So investors are
turning to high-dividend stocks."
Mirae has seen rising flows into its low-volatility,
high-dividend ETF that tracks the Hang Seng High Dividend Yield
index, he said. The firm also has nine smart-beta ETFs listed in
South Korea employing a number of smart-beta strategies.
In a low interest rate environment, actively managed funds
become costly for investors, particularly when they do not
outperform passive strategies.
For instance, the average expense ratio for smart-beta ETFs
investing in Hong Kong equities is 0.67 percent, versus 1.77
percent for actively managed funds, according to Morningstar.
Yet, passive strategies have, on average, outperformed
active management in seven out of 11 markets in Asia, including
Hong Kong, over the past three years, Morningstar data shows.
"When the return is 12 percent, paying 1 percent is okay,"
said Jason Hsu, chief executive officer of Rayliant Global
Advisors in Hong Kong, which plans to offer smart-beta ETFs
focused on Chinese equities next year. "If the expected return
is 6 percent, paying 1 percent in active fees might feel like
too substantial a cost."
Australian pension fund CBUS Super began investing in
smart-beta strategies in 2011 for global equities, starting at 5
percent of its world stocks portfolio.
That share, employing value and low-volatility strategies,
has now risen to 20 percent, and CBUS may expand smart-beta to
domestic small-cap stocks and emerging markets too, said Brett
Chatfield, general manager for public markets at CBUS.
Smart-beta products have proven especially popular in Japan,
where negative interest rates and a strong yen have weighed on
Blackrock's iShares unit listed two smart-beta products in
Japan late last year, one focused on minimum volatility and the
other on high dividends.
Nikko Asset Management listed one high-dividend,
low-volatility smart-beta ETF on the Tokyo Stock Exchange in
"In Japan's low-interest environment, there is strong demand
from clients for high dividends," said Koei Imai, head of
Nikko's ETF Centre.
Japan accounted for the biggest slice of assets under
management in smart-beta ETFs, with $7.3 billion invested.
Initiatives from the Government Pension Investment Fund and the
Bank of Japan to get investors to increase their exposure to
ETFs have driven some of these inflows.
Despite the growth, the Asia-Pacific region accounts for
just 2 percent of smart beta assets under management and 12
percent of the number of smart-beta ETFs, according to
Morningstar. The U.S. accounted for 89 percent of the assets and
54 percent of the total number of products.
"We will see a greater number of smart-beta ETFs list in the
Asia Pacific, and those funds, and those that exist already,
attract inflows," said Susan Chan, head of iShares Asia Pacific.
"That will be driven by increased knowledge of how to use
smart-beta ETFs, lower returns across asset classes globally,
and a greater focus on investment cost regionally, as has
happened elsewhere in the world."
(Reporting By Nichola Saminather; Editing by Nachum Kaplan and