Pimco, J.P. Morgan build out smart beta franchises as sector heats up

Massive investment firms look to tackle a growing theme in fund management

Jan 8, 2015 @ 4:56 pm

By Trevor Hunnicutt

Pimco and J.P. Morgan separately announced expansions to their suite of smart beta funds Thursday, adding to a quickly expanding trend in alternative investment strategies.

Pimco said it plans to expand its strategic relationship with Rob Arnott's smart beta-focused firm Research Affiliates, announcing seven new stock-centric strategies. The two companies already work together on investment strategies, with $30 billion in assets marketed under the Pimco Fundamental IndexPLUS AR brand.

The expansion represents Pimco's rebooted effort to build a business in stock funds as the bond market enters a new, and possibly more challenging, market with U.S. interest rates widely expected to rise this year, and after the departure last year of co-founder and famed bond manager Bill Gross.

The announcement came on the same day J.P. Morgan Asset Management said it was expanding its suite of what it calls "strategic beta," a term used interchangeably with smart beta. It launched the JPMorgan Diversified Return Emerging Markets Equity ETF (JPEM), its third ETF in the space.

And on Monday, Nasdaq OMX Group Inc., the exchange operator that is also one of the top builders of the indexes backing ETFs, said it agreed to acquire Dorsey Wright & Associates, an investment advisory firm that specializes in souped-up smart beta benchmarks, for $225 million in cash and debt.

(More: Goldman Sachs details plans for liquid alts, 'smart beta' ETFs)

Interest in deviating from market-cap-weighted indexes to boost returns or manage market risk, the central goal of smart beta, is on the rise.

Traditional, cap-weighted funds allocate to stocks in proportion to their market size, meaning listed companies with higher valuations earn the lion's share of an investor's dollars. Smart beta funds favor other characteristics, such as low volatility.

By using a set of rules to deviate from the market, smart beta managers claim to offer the possibility to emulate the outperforming strategies of active managers but at a lower cost. Expense ratios on funds in the space tend to be lower than those supporting active managers but higher than traditional index funds.

Providers of smart beta indexes have in recent years been lifted by investor and adviser interest and a marketing push by fund providers looking to compete with plain-vanilla index funds, which remain dominant.

Today, $1 of every $5 moving into ETFs goes into products that Morningstar Inc. calls strategic beta. (Morningstar also licenses indexes to fund companies.)


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