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Are factor-based strategies gaining traction in Asia?

Private bank investment in iShares smart beta products increased by five times since the beginning of 2017, according to Ben Garland, Blackrock’s Hong Kong-based head of factor investing for Asia-Pacific.
Ben Garland, Blackrock

As of the end of March, Blackrock managed $700m in smart beta products on behalf of private banks in Asia-Pacific, compared to $135m at the beginning of 2017, said Garland, who’s role is focused on client communication. Total net inflows from private banks in 2017 was $400m, while 2018 inflows ending March was at $110m.

The primary contributors came from Hong Kong, Singapore, Taiwan and Japan, Garland added. Globally, the firm has around 115 smart beta ETFs, with the majority of them listed in US and Europe. In Asia, the firm has some of the products listed in Japan and in Australia, but not in Hong Kong or Singapore.

Competition and demand

Seeyond, a Natixis affiliate, and Hong Kong-based Premia Partners, which is made up of ex-Blackrock people, are also firms with smart beta strategies for sale in Asia.

Rebecca Chua left Blackrock to set up Premia and is the firm’s managing partner. She said last year the firm launched two China ETFs using a factor approach and she was surprised how quickly they gathered assets.

At the end of June, the Premia CSI Caixin China New Economy ETF had RMB 422m ($62.91m) in AUM and the firm’s CSI Caixin China Bedrock Economy ETF had RMB 409m, according to the fund factsheets.

Smart beta ETFs domiciled in Asia held only $18.2bn at the end of 2017 — tiny compared to developed markets. However, collective AUM grew about 70% the same year, outpacing other regions, according to data from Morningstar.

Findings from a survey conducted by Brown Brothers Harriman in May to 100 professional ETF investors in Greater China suggest an increasing demand for smart beta products. Around 60% of respondents in both Hong Kong and Taiwan said they were planning to increase investments in smart beta ETFs, which compares to only 29% in the US and 34% in Europe.

Currently, 33% of Hong Kong investors have more than 10% of their AUM invested in these products.

 

Source: Brown Brothers Harriman

 

The bulk of wealth management assets in Asia still come from the advisory business. However, Garland believes the gradual growth in discretionary portfolio management may be one factor that is supporting interest in smart beta products.

“The move toward discretionary portfolio management is causing investors or the implementation desks in private banks to have a little bit more in terms of factor-investing strategies because they are now thinking about building more cost-effective portfolios,” Garland said.

In Asia, the firm co-designed a long-only factor strategy with Bank of Singapore, which is offered under the bank’s discretionary business. The co-designed product has raised around $400m since its launch 18 months ago, according to the firm.

The firm also said it raised $300m from clients at two private banks in Japan for a long-short, leveraged, market neutral liquid alternatives strategy which is under the firm’s factors platform.

In total, Blackrock’s factors platform, which includes smart beta ETFs and actively managed strategies, had $210bn in assets, with around 10% of that sourced from clients in Asia-Pacific, according to Garland.

Unwanted exposure risk

Unintended risk could result when managing factor-based investing strategies, according to Garland.

When building factor-based investing portfolios, managers will have incidental tilts. For example, if a strategy is focused on a specific factor, there will be a tendency to have unwanted exposure toward a sector, country or currency.

“The way you manage risk in the portfolio is absolutely critical so you can avoid incidental risks that can have a detrimental impact on the portfolio,” he said.

Joel Coverdale, Hong Kong-based managing director for Asia-Pacific at risk management firm Axioma, said that investors should be aware of the return drivers of smart-beta products.

“You might choose the top 20 low volatility stocks [and the majority of them] might be banks, because banks may happen to be low volatility at the moment,” Coverdale said. “Am I taking on a bank risk or a low volatility risk, and if they are Chinese banks, am I taking a country risk?”

Part of the Bonhill Group.