Alternative index tracking is an out of date strategy for capturing equity market beta, according to AXA Investment Managers (AXA IM).
The investment manager said that while alternative index tracking is an improvement to traditional market cap weighted indices, investors need to look at new ways to capture equity market beta.
“An index will indiscriminately buy every share in the universe and some of those shares, frankly, no one in their right mind would buy at a particular point in time, because they are so overpriced or so much risk exists with them,” AXA IM head of institutional client strategy Tim Gardener said.
“The smart investor says ‘I don’t have to hold everything to get beta so I’m just going to not invest in those things.'”
In response to this, AXA IM has expanded their SmartBeta range with the launch of a global equity strategy.
The SmartBeta solution uses risk filters and diversification tactics to access equity beta without the risk of index tracking.
“What we’ve done is we’ve said we’re going to go one stage further,” Mr Gardener said.
“We’re not taking active positions, we’re not buying the six stocks that we like best, we’re just taking out stocks that we really like least.”
AXA IM’s director of Australia and New Zealand Craig Hurt said that MySuper regulations have introduced a lot of fee pressure in the Australian market, resulting in investors shifting into passive management.
He said that while this strategy has been successful over the last five years, extended periods of monetary stimulus often lead to market bubbles.
“Bubbles by their very nature cannot be forecast and at some stage, they will burst,” Mr Hurt said.
“Investors have gone into passive indices due to fee pressure; we think there might be a different way of approaching it.”
