A smart solution to harvesting beta from fixed income and equity markets
An issue passive investors have faced for many years is how best to harvest the beta available from financial markets, at a low cost. The most common approach thus far has been to simply track the relevant market capitalisation-weighted index, despite a number of well-documented shortcomings associated with this approach.
- For Corporate Bonds, diversifying using market capitalisation weightings seems a strange way to minimise credit risk, given that it dictates a greater investment in the most indebted companies – ultimately, not the best reward for investors.
- For Equities, passively invested market cap weighted strategies fail equity investors by clinging to past winners, assuming that the price of a stock is always a fair reflection of its true value and not offering real diversification across names, sizes and sectors.
With these shortcomings in mind, AXA IM has developed its SmartBeta solution, a long-term investment strategy that aims to capture market beta more efficiently, at a low cost.