Alternative beta

Alternative beta strategies are referred to by many different names - smart beta, strategy indices, customised indexing - but, simply stated, encompass any strategy that tracks an index whose methodology is driven by some rule or factor(s), other than simple market capitalisation.

Equity factors captured by alternative indices

There are a number of equity factors which can be considered as part of an alternative index, shown in the table below.

Equity factors captured by alternative indices

Value

Value stocks outperform growth stocks: undervalued stocks, as measured by accounting data and ratios (e.g. book value / market value, dividend), generate higher returns than overvalued stocks

Volatility

Low volatility stocks outperform high volatility stocks: known as the "low volatility anomaly" because it contradicts conventional finance wisdom of a trade-off between risk and return

Size

Small cap stocks outperform large cap stocks: negative relation between stock returns and the company market value

Profitability / Quality

High quality stocks outperform low quality stocks: more profitable companies, as measured by accounting data (e.g. profit margin, profit growth), generate higher returns than less profitable companies

Momentum

Stocks with recent (3-12 months) high price performance tend to continue their high price performance in the near term (3-12 months)

We believe that of the five factors listed, value, volatility and quality could provide investors with significant benefit.

The benefits of index blending

Whilst historical evidence shows alternative indices have outperformed the market over the long term, each factor typically experiences a different performance pattern. Thus choosing a blend of alternative indices can provide diversification benefits. By working in partnership with you, we believe we can deliver a diversified blend of indices to meet your desired objective.

Our alternative beta offering

The Structured Beta & Indexing team have been managing portfolios benchmarked to alternative beta indices since early 2010. We can custom blend alternative beta indices depending on clients’ individual requirements. Our focus is on innovative solutions and we continually review our offering to ensure we are meeting your needs.

If you require further information please get in touch.

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