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Practical applications of smart beta

Practical applications of smart beta

A smart beta solution can represent a key tool for investors seeking to monitor risk and optimise their performance. Bruno Taillardat, global head of smart beta and factor investing at Amundi, discusses how investors can get the best from this investment strategy

Over the past few years, institutional investors have been getting to grips with the concept of smart beta. And, while some have allocated funds to one or more of these strategies, many remain unaware of its potential.

Smart beta products can offer solutions to specific issues, and investors may be surprised to find these strategies can be used in a range of scenarios to monitor risk and improve potential performance while keeping a lid on costs.

In this article, Amundi shares four examples of how smart beta can be used. It should be noted, however, that every client is different, and a well-resourced asset manager would be able to propose a solution according to their clients’ specific requirements.


Case 1 – Improving portfolio returns while monitoring risk

Today’s peculiar market conditions pose a dilemma for institutional investors. Nowadays, yields on fixed-income securities – whose profile is often less risky than equities – are very low, and while equity securities could potentially provide attractive returns, they are riskier because of higher volatility.

In this context, because of low expected returns and increasing asymmetrical risk in bond markets, a balanced investor may want to reallocate from fixed income to equities while avoiding an increase in overall risk. 

Certain smart beta strategies can allow investors to switch a bigger portion of their portfolio to equities while keeping a lid on risk. Switching from a market cap-weighted index to a low-volatility smart beta product allows investors to improve the return profile of their portfolios, at the same time limiting the impact of portfolio volatility.

The Amundi Conservative Equities range, for example, aims to offer exposure to equity markets with a lower volatility while maintaining the same expected potential returns. Investors can thus increase their allocation to equity without changing their overall risk. The investment process is based on a robust portfolio construction, ensuring a good level of diversification, thereby providing lower risk and more resilience compared with the benchmark. 

The management team implements a process based on a systematic multi-criteria analysis to select quality stocks by taking care of liquidity. A quantitative optimisation process is then applied, aiming to build a portfolio with low volatility by ensuring it is not strongly exposed to risk factors with highly asymmetrical behaviour – so avoiding ‘crowded trades’ and exposure to downside traction.

Our solution – when exposed to European equities, for example – has a proven track record of performance enhancement over the past seven years, outperforming its benchmark (the MSCI Europe index) in five out of seven observed years, with reduced maximum drawdowns versus benchmark drawdowns.1 


Case 2 – Integrating environmental, social and governance (ESG) factors into a smart beta portfolio

A leading Dutch charitable foundation wanted to restructure its entire equity portfolio to reflect its cultural ethos of social responsibility and good governance, as well as to access the superior returns of smart beta strategies.

However, the foundation’s board was concerned that too great a focus on ESG factors would push the performance too far from its internal reference benchmark. 

The investor was also concerned that including an ESG filter might narrow the investment universe too greatly, diluting the fund’s ‘smart’ characteristics and reducing portfolio performance.

In the past, Amundi has achieved these different investment goals by employing a number of asset managers, each with specific mandates – some focused on ESG targets with others providing a smart beta approach.

This is not necessary, however – all these investment aims can be applied to the whole equity portfolio. Firstly, Amundi created a fund that accessed a number of different investment factors, then applied an ESG filter. 

This filter reduced the investment universe by 40%. However, using risk-monitoring techniques such as minimising volatility and reducing correlation preserved the potential performance of this fund. This was a suitable outcome for the foundation, as all the funds could be consolidated with a single manager who could apply a smart beta strategy and an ESG filter to the entire equity portfolio. This resulted in lower fees, though performance did not deviate too far from the reference benchmark. 


Case 3 – Using smart beta to maintain potential capital preservation

European insurance companies increasingly use strategies known as constant proportion portfolio insurance (CPPI) products. These products have a dynamic mix of cash and equities, ensuring the invested capital does not fall below a certain value.

An average product has a maturity of five years, which would provide up to 80% capital preservation. These products are popular with insurance companies because they have a lower capital cost than other forms of investment, enabling the firm to comply more easily with Solvency II regulation. The potential capital preservation makes them popular retail products.

When the value of the portfolio falls to a level close to the amount preserved in the product, equities must be sold to ensure the promise can be met. Once the threshold level is reached, however, the entire portfolio must be invested in low-risk or cash funds, as any additional equity holding would undermine the capital guarantee. Once the portfolio is entirely invested in cash or low-risk funds, it cannot be re-invested in equities.

While this policy of selling equities would ensure the capital guarantee is met, the ultra-low-yield environment makes it hard to produce any returns from a portfolio invested entirely in cash, as yields are currently negative. In addition, the fund is a forced equity seller when values are falling, which could reduce returns further. These two characteristics result in a cash lock-in, which is a negative event.

However, if the fund were to use a low-volatility equity strategy, rather than a standard market-cap index, the possibility of reaching this threshold is less likely – thus reducing the chances of a cash lock-in.

CPPI products constructed using low-volatility equity strategies are much less likely to trigger this equity fire sale. Between the end of 2008 and January 2016, a CPPI product using the Amundi Europe conservative strategy, rather than MSCI Europe stocks,2 maintained a much higher allocation to equities.

The fund constructed with Amundi’s low-volatility fund has a minimum equity exposure of 15% and a maximum of 81%, while one constructed using MSCI Europe has a minimum of 4% and a maximum of 75%.3


Case 4 – Smart beta instead of traditional active managers

 A Canadian client with a global equity portfolio was interested in using an active strategy, rather than a standard market cap-weighted index, to give the portfolio exposure to stocks with a high dividend yield, but wanted these shares to be chosen using fundamental analysis, rather than a straightforward systematic approach.

It is now possible to build a smart beta portfolio with an emphasis on high dividend stocks using qualitative factors, as well as quantitative ones. This can be achieved by using a sophisticated filter that screens for more fundamental metrics – such as cashflow generation, low debt levels and profitability – which can allow dividend payments to remain sustainable over the medium term.

Applying a fundamental analysis by using a high-quality filter reduces the universe of 1,600 investable stocks to 650. This universe is then filtered for high dividend stocks, while ensuring the portfolio has optimum diversification by picking stocks with minimal reciprocal correlation. Thus, despite it being invested in only 100 stocks, the final portfolio meets all of the client’s requirements.



The increase in demand from investors and offers from asset managers around smart beta solutions is now particularly significant. These examples of smart beta’s practical applications prove that it can be used for a variety of purposes, with the objective of maintaining potential performance, enhancing diversification and monitoring risks. 

Today, investors could benefit from a large offering of smart beta strategy implementation – be it active management, exchange-traded funds (ETFs) or index funds – and could go one step further by applying a tailor-made smart beta approach to an existing portfolio to keep initial constraints. As Europe’s largest asset manager,4 Amundi is fully committed to accompanying investors taking up smart beta in their asset allocation and building the appropriate solutions for their specific needs.


1 Amundi, as of December 31, 2016.

2 The funds are not sponsored, endorsed, sold or promoted by MSCI, any of its affiliates, any of its information providers or any other third party involved in or related to compiling, computing or creating any MSCI index (collectively, the ‘MSCI parties’). The MSCI indexes are the exclusive property of MSCI. MSCI and the MSCI index names are service mark(s) of MSCI or its affiliates and have been licensed for use for certain purposes by Amundi Asset Management. None of the MSCI parties make any representation or warranty, express or implied, to the issuer or owners of this fund or any other person or entity regarding the advisability of investing in funds generally, or in this fund particularly, or the ability of any MSCI index to track corresponding stock market performance. A complete description of the MSCI indexes is available on request from MSCI. MSCI indexes are registered trademarks of MSCI, which are used to identify indexes it calculates and publishes. MSCI guarantees neither the value of the index at any given time nor the results or performance of products indexed against this index. 

3 Simulation on pure algorithmic CPPI management realised by Amundi, based on annualised performances between December 31, 2007 and January 29, 2016.

4 Investment & Pensions Europe, Top 400 asset managers, published in June 2017 and based on AUM as of end December 2016.


This document is not intended for citizens or residents of the United States of America nor for any ‘US person’, as this term is defined in SEC Regulation S under the US Securities Act of 1933 and in the prospectus of the fund. The ‘US person’ definition is provided in the legal mentions of our website: www.amundi.com.
Investors are subject to the risk of loss of capital. Promotional and non-contractual information should not in any way be regarded as investment advice, an investment recommendation, a solicitation of an investment offer or a purchase of any financial securities.
The accuracy, completeness and relevance of the information, forecasts and analyses provided are not guaranteed. They have been prepared from sources considered reliable and may be altered without prior notice. The information and forecasts are inevitably partial, provided on the basis of market data observed at a particular moment, and are subject to change.
Transaction cost and commissions may occur when trading ETFs.
Information reputed exact as of August 2017.
Reproduction prohibited without the written consent of the management company.
Amundi ETF designates the ETF business of Amundi Asset Management.
This document was not reviewed/stamped/approved by any financial authority.
Amundi Asset Management with share capital of €1,086,262,605 is a portfolio management company approved by the Autorité des Marchés Financiers (AMF), with no. GP 04000036. Registered office: 90 Boulevard Pasteur, 75015 Paris, France.
This document is being issued inside the United Kingdom by Amundi, which is authorised by the AMF and subject to limited regulation by the Financial Conduct Authority (FCA). Details about the extent of regulation by the FCA are available on request. This document is only directed at persons who are professional clients or eligible counterparties for the purposes of the FCA’s conduct of business sourcebook. The investments described herein are only available to such persons and this document must not be relied or acted upon by any other persons. This document may not be distributed to any person other than the person to whom it is addressed without the express prior consent of Amundi.

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