Frankfurt-based index provider Solactive has unveiled 'Intuitive Beta', a new investment approach based on a family of smart beta indices relying on a qualitative framework of intuitive screens.
The new series is proposing a simple, rules-based approach in which intuition, or 'gut feeling', takes a prominent role in defining the passive investment strategy. The aim is to offer exposure to a different field of smart beta, which is less data-driven but more focused on common sense, according to Timo Pfeiffer (pictured), head of research & business development at Solactive.
The new head of research at Solactive is focusing on rolling out new structuring and index development capabilities to serve the structured products market, with the goal of creating and analysing new quantitative investment strategies.
"The new Intuitive Beta investment approach has been developed as a sub-set of smart beta strategies," said Pfeiffer. "The starting point was that we saw a gap for strategies that do not purely depend on numbers and figures. Having worked in structured products for many years, I am aware that providers are also seeking a storyline behind the strategies they deploy in their products."
In this context, Solactive will deploy simple explanatory variables of performance to select and weight index components with the aim of providing simplicity, intuition and transparency. According to Pfeiffer, as Warren Buffet famously said, "Never invest in a business you cannot understand".
"We want to make this statement the cornerstone of Intuitive Beta," said Pfeiffer. "Within this framework, we focus on gut feelings and common sense when developing a strategy. We are therefore going beyond purely quantitative screens by promoting an approach that puts forward intuitive investment stories that should of course also translate into performance. We see this as an evolution of the smart beta concept."
The Intuitive Beta investment approach is based on taking into consideration feelings and emotions when selecting and weighting index components, according to Pfeiffer. "This is a very simple approach and within this framework we are building a whole range of investment strategies targeted at index-linked and structured products," said Pfeiffer.
Pfeiffer mentions Du Pont, Walt Disney, and Coca-Cola as examples. Aside from being among the 500 largest companies in the US, they are some of the oldest companies around, the 'Methuselah' of the US stock market, according to Pfeiffer. "One of their appealing characteristics is that they have demonstrated to be resilient over time, going through repeated business cycles," said Pfeiffer. "Since corporate longevity is more the exception rather than the rule, it could be interesting for investors to gain exposure to a basket of 'time-proof' companies that have managed to weather the storm and navigate successfully to calmer waters over and over again. In an era where the average lifespan of a company keeps declining, long-run success becomes an intuitive and straightforward indicator of superior performance."
The first strategy Solactive has developed under the Intuitive Beta umbrella family is based on the concept of 'workforce efficiency'. "By this, we aim at providing insight to compare the output of the workforce among peers in labour-intensive industries, such as software or finance," said Pfeiffer. "After all, people want to invest in companies that make the best use of their human capital, as this can translate into better efficiency, productivity and potentially higher profitability and share price performance."
The Solactive Intuitive Beta Workforce Efficiency, the first Intuitive Beta launch, deals exactly with this by selecting 100 companies with the highest output per employee.
According to Pfeiffer, one of the most valuable resources a company has is its workforce. "Bankers, lawyers, doctors, software developers, etc. are just some examples of labour-intensive jobs where the success of the firm mainly depends on the efficiency of its employees," said Pfeiffer. "After all, would you invest in companies with poor processes and unproductive employees? It would therefore be very insightful to compare the output of the workforce among peers and offer access to the companies that perform best in terms of workforce efficiency."
The market continues to move towards simplicity, transparency and intuition, which serve as guidance in all our strategies, said Pfeiffer, adding that Intuitive Beta is based on these three pillars.
"We are talking to product providers to test the concept and the feedback we have received is positive," said Pfeiffer. "As such, we think there is the potential to develop products, since this kind of concept has an interesting story which could fit protected structures, as well as tracker certificates or ETFs."
Smart beta strategies have continued to propel sales in the ETF segment with a number of structured products also moving to cash in on the back of a turbulent equity environment. Assets invested in smart beta equity ETFs/ETPs listed globally reached a new record of US$592bn at the end of the first half of 2017, according to ETFGI.
In the structured products market, a number of manufacturers have made inroads into this segment including Natixis which has launched the Natixis' Cac Large 60 index and has licensed the Euro iStoxx 70 Equal Weight Decrement 5% Index to develop a range of structured products. Barclays reported in 2016 that assets invested in its Ossiam Shiller Barclays CAPE US Sector Value TR ETF amounted to over US$400m. Meanwhile, Stoxx reported that assets invested in structured products linked to its iStoxx smart beta range reached US$1bn in 2016.
Stoxx has also been at the forefront of developments in this segment and beefed up last year its Stoxx Select and Stoxx Diversification Select index families that were introduced in October 2015 with a combination of investment themes such as low carbon and ESG with low volatility, high dividend and low correlation screens to create hybrid index concepts to set an attractive pricing framework "especially for structured products".
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