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      Smart Beta

      An established asset management discipline

      " Just as globalization breaks down country borders, Strategic Beta disrupted the artificial boundary between active and passive asset management.

      Martin Weithofer Head of Strategic Beta

      Our view of Strategic Beta: Outcome oriented

      Our Thought process

      Observe markets

      - Product, innovation and flows monitoring
      - Quantitative market analysis
      - Factor analysis
      - On-depth portfolio analysis

      Define valuation principles

      - Market research practice review
      - Fundamental data by: country, sector and factor

      Deliver solutions

      Better understand the markets

      - Thought leadership
      - Buy-side strategy research
      - Portfolio construction

      Develop products, e.g.

      - Quality & yield bond ETFs
      (Deutsche.4C & Yield Plus strategies)
      - Equity factor ETFs
      - Beta and Beta Plus strategies

      Our Objective

      Our key objective is to provide our investors with strategies and insights helping them to achieve specific goals in their asset allocation. As a growing portion of our investors, we believe that Strategic Beta can be used within a core portfolio, as part of a long term allocation. It is therefore essential for us that Strategic Beta Strategies are explained in the most transparent way, sponsored by tier-one index providers, and have a clear investment function:

      • Durably increase income
      • Control risks quantitatively or fundamentally
      • Generate excess returns in certain market phases
      • Increase diversification versus standard investment strategies

      Our Philosophy

      Challenge the rules, change the rules

      Traditionally, passive funds have tracked capitalisation-weighted indices, which are popular for their low cost, high diversification and liquidity. But certain weaknesses from such indices have been established among investors and academics: Equity indices have a tendency to have greater exposure to a company because its share price has gone up, while Bond indices are exposed most heavily to issuers that are the most heavily indebted. Strategic Beta aims to challenge benchmark index rules and to break the link between market value and index weightings.

      Building on traditional advantages

      Strategic beta builds on the advantages of traditional index investing. Strategic beta is easy to access, both via exchange-traded funds (ETFs) and in the form of investment mandates and pooled index funds. And strategic beta comes at a lower cost than traditional active management, even though its aim of improving upon the market’s risk and reward is similar.

      Adding Strategic Beta to your portfolio: Implementation examples

      Blending Active and Passive

      Strategic beta attempts to identify how a portfolio can be structured in a way that enhances returns or minimizes risk absolute or relative to a traditional market-cap-weighted benchmark. It blends aspects of active and passive investing by tracking indexes with a value-add component, such as enhanced return or risk reduction.

      From a complement to a radically new form of asset allocation

      Strategic Beta can be both: a complement to existing portfolio allocations as well as form the building blocks of a radically new asset allocation framework. For investors with exposure to a capitalisation-weighted index, strategic beta targets an improved risk-return outcome. Strategies such dividend or equal weighting may be relevant in this context. More radically some investors have changed their allocation framework fundamentally to factor-based.

      Case 1: Re-allocating the Global aggregate

      Thanks to the use of Strategic Beta indices, it is possible to re-compose aggregate bond benchmarks, which are composed of all types of high grade tradable debt instruments, so as to target an enhancement of their risk-return profile through improved allocation of risk/yield budgets. In the following example,

      • the additional risk from more fundamentally risky sovereigns can be reduced for a reasonable cost in terms of yield, at level of the aggregate portfolio
      • Additional yields from Investment Grade corporates can be generated through yield driven selection at reasonable costs in terms of risks, at level of the aggregate portfolio

      Case 2: Reducing volatility for European Equities

      Thanks to the combination of factor indices, it is possible to steer equity market returns towards attractive premia such as low vol and size, at controlable costs in terms of tracking error. Both Size and Low Vol offered enhanced risk-adjusted returns in normal market conditions as well as additional diversification benefits in more difficult market regimes.

      Available Strategies

      Reduce risk Increase return Optimize income
      Equities

      Equity factor Low Volatility
      Equity factor Quality
      Dividend strategy

      		 Equity factor Value
      Equity factor Momentum
      Equity factor Quality
      Size (Equal Weight)      		 Dividend strategy
      Bonds Quality-Weighted Sovereign Bonds Yield Plus Yield Plus

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