Janus’ INTECH Gets Smarter About Smart Beta
Volatility, to portfolio managers, often appears as something akin to a cost of doing business. In order to gain exposure to a basket of securities, and earn profits in the form of beta, one must be willing to incur the risk of fluctuations in the performance of the index being tracked due to market forces or economic turbulence.
However, there’s another way to look at volatility, namely as a source of profits, rather than a dampener. The key is to dynamically rebalance the portfolio to smooth out the expected return, according to Adrian Banner, CEO of INTECH, a mathematically-oriented fund manager with over $45 billion in assets under management as of December 31, 2013.
The company was founded on the basis of a discovery that it is possible to use volatility as a source of reward, not just risk. “That insight has been used to construct portfolios since 1987,” said Adrian Banner, CEO of INTECH.
INTECH’s flagship product, U.S. Enhanced Plus, targets outperformance of the S&P 500 by about 175 basis points per year, with very tight control on the tracking error. “These relative risk strategies are designed to be consistent in their outperformance of the benchmark index,” Banner said.
The company has since expanded those capabilities to a variety of markets, including global markets.
“For over nine years, we’ve been an active player in the global and international equities space, and have recently expanded our capabilities to include emerging markets as well,” Banner said. “Many investors are thinking less regionally and more globally. This is true in the U.S. as well; it’s a slow but inexorable move.”
A second way that INTECH has responded to market conditions is to extend its capabilities to what Banner calls “absolute risk.”
“There’s a lot of interest in low volatility and managed volatility strategies, where you’re using a long-only equity portfolio to earn the equity premium, without so much of a drawdown along the way,” he said. “We’ve used our expertise in volatility to engineer solutions to address absolute risk, and mitigate that dynamically over time.”
He continued, “Smart beta is the idea that you can systematically reweight the same stocks in the S&P 500 (for example), not by market cap, but equally, or by fundamentals, volatility, etc.,” Banner said. “Over the long term, these strategies in backtests and live portfolio management have seemed to be more efficient.”
The next step beyond smart beta is “smart alpha.” “Most people think of beta as the index, and alpha as beating the index,” Banner said. “Once you recognize that what’s driving most smart beta strategies is that they are diversified more than the index and they are rebalanced, then you can be smarter about it still. So rather than just smart beta, we think one can strive for smart alpha, where you’re making use of the same phenomenon, but really targeting extra efficiency. This dynamic strategy means that the portfolio can adapt to different market conditions.”
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