Will the smart money keep flowing into Smart Beta products?

Smart Beta funds have recently showed impressive asset growth. Loftie Botha, portfolio manager at Momentum Investments, explains why this growth should not come as a surprise.

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Loftie Botha, portfolio manager at Momentum Investments

Market cap weighted index funds are widely used in South Africa, but Smart Beta funds have recently showed impressive asset growth.

Figures from Morningstar on the General Equity Unit Trust category show a few interesting trends:

  • Of the R380.5-billion invested assets by the end of June 2021, only R15.2-billion was invested in Smart Beta funds.
  • Over the past decade the General Equity category grew assets by 11% p.a., while the Smart Beta segment grew assets by 31% p.a.
  • The market share of Smart Beta funds expanded from 1.3% to 4%, and the number of funds increased from 5 to 25 over the same period.

The global trend of the exponential growth in Smart Beta is therefore firmly in place in the local market, albeit from a low base.

This growth should not come as a surprise as the main drivers of global Smart Beta growth – return enhancement, risk reduction via style diversification and cost savings – are also present in South Africa.

Smart Beta investing is an investment approach in which decisions are based on objective data, rather than on subjective opinions. Smart Beta portfolio managers rely more on quantitative techniques than on fundamental analysis. A Smart Beta portfolio may follow a single style such as momentum, value or quality, or it may be diversified over a combination of styles, where it would be referred to as a multi factor portfolio.

Return enhancement 

Of the 179 South African General Equity Unit Trusts that had three-year performance track records as of 30 June 2021, 20 are considered to be Smart Beta funds. A simple analysis of the performance of these funds shows that Smart Beta investors generally received performance that was either in line with or better than what was delivered by the rest of the funds.

Both the R2.5-billion Momentum Trending Equity Fund and the R1.5-billion Momentum Value Equity Funds are among the Smart Beta funds that delivered top quartile performance. From their combined launch date on 4 April 2017 to 30 September 2021 they respectively returned 4.9% p.a. and 4% p.a. above their FTSE/JSE Capped Swix benchmark (see the charts below).

Risk reduction via style diversification 

The dominant Smart Beta styles are momentum (or trend following), value and quality. History has proved that all three styles do well over a full market cycle. However, different styles often out- or underperform at different points in time.

Diversifying across portfolios that follow different investment styles provides better risk reduction than diversifying over different traditional funds that often follow the same investment approach. To enable investors to do just this, Momentum Investments offer a suite of three single style Smart Beta offerings:

  • Momentum Trending Equity Unit Trust (launched April 2017)
  • Momentum Value Equity Unit Trust (launched April 2017)
  • Momentum Quality Equity Unit Trust (launched August 2021)

A distinct advantage of Smart Beta funds is that they do not expose investors to the risk of style drifting as they follow systematic approaches to investing and hence stick to their mandated styles. Traditional managers sometimes get tempted to adapt their investment approach during a period of underperformance, and when their approach is back in vogue, they may not participate in the upside. This can be disappointing for clients who have patiently been waiting for the fund’s approach to get back into fashion.

A distinct advantage of Smart Beta funds is that they do not expose investors to the risk of style drifting as they follow systematic approaches to investing and hence stick to their mandated styles.

While some investors may have preferences for different styles, we recommend investing in a carefully weighted blend of these funds to ensure smoother returns. Investing is personal and a smoother investment journey will ultimately help clients to achieve their personal financial goals.

Cost savings 

Smart Beta funds offer value-for-money, based on an analysis of General Equity Unit Trust fees. While they are slightly more expensive than index tracker funds, they offer the opportunity to deliver superior performance just like traditional funds do, but at a lower fee. The table below shows the fee classes for individual investors as they appear in surveys.

While the net expense ratios for the Momentum Trending Equity and the Momentum Value Equity funds are below the median at 0.53% and 0.54% respectively, even lower fee classes are available for bulk investing.

Source: Momentum Investments and Morningstar, June 2021

As more and more investors become aware of the benefits of Smart Beta funds, the strong growth trajectory of these products is expected to remain intact.

To participate in these benefits please speak to your Momentum Consultant about Momentum Investments’ Smart Beta range. 


This article should not be seen as an offer to purchase any specific investment fund and is not to be construed as advice. Investors are encouraged to obtain independent professional investment and taxation advice before investing with or in any of the management company’s investment funds. The terms and conditions, a schedule of fees, charges and maximum commissions, performance fee frequently asked questions as well as the minimum disclosure document (MDD) and quarterly investor report (QIR) for each fund are available at momentum.co.za. Momentum Investments and Momentum Collective Investments (RF) (Pty) Ltd are part of Momentum Metropolitan Life Limited, an authorised financial services and credit provider (FSP6406).