New systems and big data shaking up investment management world

Investment management is in flux, arguably more than it has been in a long time. Active management is under pressure, with investors switching from active to index funds.

The first three present challenges for active management. But the fourth trend — the explosion of available data and related technology to analyse it — is definitely positive. Big data represents a huge positive trend for active management, particularly for active managers who embrace the opportunities presented by this development. A closely related advancement, machine learning-artificial intelligence, provides the tools to fully access and analyse this large amount of unstructured data.

Smart beta products provide exposure to broad and persistent factors that have long been a part of active management. For equities, these include small size, value, momentum, quality and low volatility. For fixed income, the factors include duration and credit. These factors have generated investor interest because they have performed well historically. Beyond that there are reasons to believe they will continue to outperform in the future, on average over time.

Nothing is wrong with an active manager delivering smart beta. Investors just need to understand what they are buying and pay a fair price for it. Investors shouldn’t pay active fees for factor exposures if they can achieve the same outcome in a low cost smart beta solution.

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