Play it smart with ‘beta’ investing

With the right knowledge and strategy, there is a way for investors to survive the challenging times we are facing now. After all, investment is a science, and when the proper strategy is followed, we can all withstand difficult market cycles.

Just like during the good times, investment principles are constant, and the same criteria applies. The basis for evaluating how and where to invest still relies on one main factor, a sound investment strategy. With a solid plan in place, one that takes into account both challenges and opportunities, investors will be on the safe side.

There are a number of factors that you need to look at when developing a sound investment strategy. In addition to aiming for solid value and high returns, it is also important to keep in mind risk levels, quality and relevance to one’s overall asset portfolio.

We’ve often heard the phrase — don’t put all your eggs in one basket. And this couldn’t be any truer when it comes to managing assets. Investors should diversify their portfolios, both across asset class levels and geographically as well.

This is a trend that we are seeing in the market at the moment. There is less interest in traditional assets, including equities, bonds and mutual funds, and a move towards tangible assets. Real estate, in particular, continues to be highly demanded in this region.

The best approach, however, is to ensure a strategic mix. Investors would do well to invest less in more expensive, higher risk sectors such as technology, and to look into more stable, less risky options such as gold.

One of the tools investors can benefit from when attempting to diversify their portfolio is ‘smart beta’. Despite there being confusion or a lack of clear agreement on what the term means, smart beta has been gaining popularity recently, as it offers investors more flexibility in designing their portfolios according to their unique needs.

Instead of relying on fixed indices, such as S&P 500 or the Barclays Aggregate, smart beta allows for the customisation of an investment strategy in a unique fashion, according to individual needs.

Rather than looking at companies purely from a market capitalisation standpoint, smart beta offers an alternative method of constructing a portfolio. Strategy-based smart betas look at metrics such as averages of cash flow, sales and dividends, whilst factor-based smart betas look at particular characteristics of stocks, and make selections accordingly.

Although smart beta has been getting lots of attention recently, it is in fact an old concept that has been around for years. What is new is the fact that this method of investing has recently been repackaged, with the term smart beta coined to define it. Generally, individual investors would place money into traditional index funds, such as those mentioned above.

The argument is that this is not the best way to invest. Since companies on such listings are looked at from a market capitalisation standpoint, investors end up, unintentionally, increasing the price of stock when they favour large-cap companies.

Another appeal of smart beta is that it allows for active control of one’s portfolio without the costs associated with fund managers. This transparent, unique and lower-cost proposition has been making true changes in the minds of investors, and many are converting to the new smart beta team.

Some investors have classified smart beta as a “passive” form of investing. A more accurate statement would be that it falls between the end of the spectrums of active and passive management. This is due to the fact that smart beta indices require subjective predications and regular rebalancing.

Despite all that’s mentioned above, it is important to note that smart beta has been causing much debate in the market between people who are adamant supporters of it and others who have disregarded it. Although it has gained its appeal due to its simplicity, that has also been one of its biggest criticisms.

Just like with any investment strategy, there are ups and downs and there is a certain level of risk involved. Investors need to ensure that they are not swayed with fancy marketing slogans, and that they approach their investment strategy with conscious knowledge and sufficient background information, to make the best decision possible for them.

The writer is the Global Head of Wealth Management and Mortgages at FGB.