Factor investing, or Smart Beta, is providing a new frontier for DC schemes to address a range of investing needs. Improved diversification and better risk-adjusted returns, together with the cost-efficiency and transparency characteristics of index investing, are key attractions.
Rather than simply weighting stocks by their market cap, as is done in index investing, Smart Beta is changing the investing landscape, and DC investors are catching on. Compared to market cap-weighted benchmarks, these factor-based strategies give schemes the opportunity to target higher returns over time, lower risk, or a combination of both, using cost-efficient implementation approaches.
Targeting factors in this way allows schemes to seek the underlying drivers of investment return that were once the sole preserve of active managers. Smart Beta effectively combines some of the benefits of both active and index management.
Predictable exposures and straightforward implementation can also help to reduce the governance burdens on DC scheme management.