High equity volatility since 2000 has been a big turn-off for the $35 trillion global pension fund industry, not least because huge waves of retirement in many aging western countries are due over the next decade. They have also been shy of the high transaction fees associated with investing in equities due to the frequent buying and selling of different stocks to beat investments benchmarks. Frustrated by little or no extra gains from costly active investing, many are now looking at more passive, cheaper and simpler strategies.
Often called "Smart Beta", one approach aims to follow certain benchmark indices passively but allow investors to tilt weightings themselves based on their preferences such as volatility or momentum, allowing them outperform the main index.
Smart beta is half way between active and passive investing. For example, an investor can take the S&P 500 index .SPX but overweight stocks with lower volatility to create a new smart index. Investing in this has potential to outperform the original benchmark index and is cheaper than paying an active manager to trade S&P stocks.
At least $20 billion of pension fund assets tracked by consultancy Towers Watson is already invested in smart beta strategies. Early adopters include Danish fund PKA, the Dutch PNO Media fund and Britain’s Wiltshire County Council fund.