BNP Paribas Asset Management

Robert Haugen, who discovered the low-volatility anomaly in 1972, wrote numerous articles and books to try to popularise what he called the ‘hidden factor’. To some extent, it was only the advent of smart beta investment strategies that turned his dream into reality, as low volatility is central to the smart beta approach.

Momentum is unloved: being a good follower is rarely seen as a strength, and few asset managers would brag about using momentum as an investment factor, even though they know that ‘the trend is your friend’.

Recent bad news for the US economy seems to have been positively interpreted by financial markets. The sudden drop in the ISM manufacturing index and the labour market report for August were disappointing.

The end of the year is often a time of lists. It is also a time to look back as well as ahead and wonder what of 2015 will recur in 2016. Each year brings its own particular crop of words and vocabulary which reflect events or particular themes – in short, the prevailing ‘Zeitgeist’. As avid followers of what’s going on in the financial services industry and asset management in particular, here are some of the buzzwords that strike us as reflecting the events and themes of 2015 in asset management.

After the 3 December policy meeting, the ECB announced several measures to support the eurozone economy and bring inflation closer to its target.

As the world’s countries gather in Paris for the 21st Conference of the Parties (COP21) to discuss action to tackle climate change, here is a reminder of where countries and regions stand in terms of greenhouse gas emissions (GHGs) and by implication which countries and regions can make the largest contributions to reducing GHGs and limit global warming to less than 2 degrees Celsius.

The human population continues to grow. At the same time the standard of living in many emerging countries is improving and consumption habits are becoming identical to those in developed countries, with new technologies introduced at breakneck speed, a dominance of disposable products and feeble rates of waste recycling.

‘Smart beta’ sounds like an oxymoron. How smart can it be to continue using the same strategy in such fickle markets? A portfolio manager calling on all his skills (‘alpha’) in analysing market environments (the source of ‘beta’) should be able to outperform an unchanged algorithm, right?

The fifth plenum of the 18th Communist Party Congress concluded on 29 October 2015. One headline outcome was the abolition of the one-child policy, a major step towards better-balanced demographics. However, for us, the most significant announcement was the annual GDP growth rate target of at least 6.53% in the next five years to meet the government’s goal of establishing a “moderately prosperous society”.

In our view, diversified multi-factor approaches exposed to value, low risk, momentum and quality premiums with a strong focus on risk management offer better value for the management fees an investor pays than off-the-shelf smart beta indices.