How disruptive can Smart Beta be to the South African Active Fund Management Fraternity?

Abstract

This research paper explores the theme of Smart Beta and the current state of inefficiency of active fund fee structures in South African domestic equity unit trusts. The emerging understanding is that many of the latent sources of value-add (or alpha) of active fund managers are currently accessible in cheaper form via Smart Beta products. Smart Beta products use mechanical and automated rules to establish exposures to tradeable instruments that emulate many of the understood and replicable themes in current active asset management. We sample 91 well-known general equity funds along with nine local Smart Beta funds and demonstrate how disruptive Smart Beta products could be to the fee structures of many of these active funds. We do this by mapping the reproducible elements of the active return of these funds to fungible Smart Beta factors. We conclude with five broad predictions around the active fund management industry in South Africa. Additionally, we focus on how active managers might prudently align themselves with an understanding of what aspects of their value-add are not replicable in order to persist and thrive.