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Smart beta portfolios draw in SMSFs

SMSF investors are showing interest in portfolios that move away from the standard market-cap-weighted approach and instead use a smart beta or equal-weighted approach, particularly in the international space.

Van Eck Global Australia managing director Arian Neiron said while many SMSFs’ default portfolios were closely linked to market-cap-weighted indices, many were now recognising how an equal-weighted portfolio outperformed the market and its role as a core building block for their equity portfolio.

“Given the concentration risk within market cap, the ASX 200, what we’re seeing is SMSFs – predominantly through their advisers and brokers – are looking at two parts: capital and dividend income,” Neiron told selfmanagedsuper.

“On the capital side, people say it’s all about relative performance, but fundamentally SMSFs want to preserve their capital and grow it, indexed to inflation – that’s the bare minimum.

“No one wants to lose money.

“On the dividend income side they’re looking at their equities and thinking from a sector basis and Australian economy basis, directionally, they don’t know which way they’ll go, but they want to capture the broader economy without doing all the research because there are already a lot of obligations as a trustee.”

Neiron said SMSFs were acknowledging there was concentration risk in the market, but there was also concentration risk in their portfolio.

“So they know they’ve got to have a more balanced approach,” he said.

“[An equal-weighted strategy] really complements their current state of mitigating concentration risks and also risk/return scenarios, for example, what are they likely to achieve in terms of their investment objective on a total return basis, given the banks and the large miners as well as Telstra have predominantly been quite high allocations in Australian equities.”

He said on the global equity front, smart beta was fairly well understood by SMSFs, brokers and financial advisers as it offered straightforward, quality principles when it came to investing.

“What we’re seeing now is increased learning and awareness of smart beta within the global realm and they’re really trying to take advantage of those opportunities that global smart beta strategies are providing,” he said.
“We’re finding that the more complexity there is in a smart beta strategy around the way it’s weighted to how stocks are picked, it involves greater education and greater learning.

“But that deviation away from market cap or even a managed fund is not as high as it is for Australian equities.

“The more that smart beta is understood, the more we see a greater adoption rate, particularly in the global space.”

The Market Vectors MSCI World ex Australia Quality ETF (exchange-traded fund) invests in a diversified portfolio of quality international companies listed on exchanges in developed markets around the world, excluding Australia.

Market Vectors is the ETF business of Van Eck Global.

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