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Lyxor research highlights importance of Smart Beta in new investment strategies

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Lyxor Asset Management has published a study that compares the performance of European domiciled active funds with that of their benchmarks.

 The firm writes that the research highlights the growing importance of risk factors and other Smart Beta strategies in generating performance in the current challenging market conditions.
 
The research looked at the performance of 3,740 active funds representing EUR1.2 trn in AUM compared to their traditional benchmarks over a period of ten years, Lyxor found that European domiciled active funds had a more positive year in 2015, with an average of 47 per cent outperforming their benchmarks, significantly more than 2014 where just 25 per cent outperformed on average
 
Looking at the source of this outperformance, Lyxor found a significant part could be attributed to specific risk factors. These ‘risk factors’ describe stocks that exhibit the same attributes or behaviours. Lyxor has identified five key risk factors: Low Size, Value, Quality, Low Beta and Momentum, which together account for 90 per cent of portfolio returns.
 
The research revealed that European active fund managers were overweight Low Beta, Momentum and Quality Factors in 2015, which all outperformed benchmarks. Another aspect of Lyxor’s research compared active fund performance with Minimum Variance Smart Beta indices, which are designed to reduce portfolio volatility. Here the results were even more compelling: whereas 72 per cent of active funds in the Europe category outperformed a traditional benchmark in 2015, only 14 per cent outperformed the Smart Beta index.
 
These findings demonstrate the increasing role played by Smart Beta strategies that are based on rules that do not rely on market capitalization, as an indispensable pillar of investor portfolio. Factor-investing is one of the various investment strategies referred to as Smart Beta.
 
“In today’s markets characterised by very low interest rates, higher volatility and no market trend in risky asset markets, investors need to look at new forms of portfolio allocation in order to find diversification and generate performance,” says Marlene Hassine, (pictured) head of ETF research at Lyxor Asset Management. “Smart Beta, which can be implemented, either with a more passive or a more active bias, is one of the new tools at the disposal of investors.”
 

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