In September 2016 Bruno Taillardat was brought on board from Unigestion with a remit to expand Amundi’s smart beta and factor investing division.
I caught up with him at the group’s World Investment Forum to hear how plans were progressing.
The group launched its first smart beta strategy a decade ago, today assets stand at €12 billion.
Back in 2007, Amundi termed the offering as minimum variance, today it prefers 'conservative equity'. Taillardat is keen to highlight the distinction.
Minimum variance grew in popularity after the financial crisis as investors were drawn to strategies that aimed to lower equity portfolio risk.
The strategy also aimed to offer downside protection against a backdrop of record breaking stock market highs and offered a substitute for traditional lower risk asset classes like bonds and cash, which offered unattractive real returns.
What goes up...
However, the popularity of low-risk strategies has led to higher valuations for low-volatility stocks, introducing new risks.
Taillardat said there are pitfalls to constructing a minimum variance strategy in today’s investment climate.
Stocks are less volatile than they used to be, which means a strategy optimising this will be highly correlated to the market.
'Recently we have seen the pitfalls of low volatility strategies. They are very expensive as they have done extremely well over the last few years. This is a risk to me.
'I’ve never seen before to this degree low volatility stocks being used as a proxy for bonds, this is a result of the low interest rate environment. But these companies – the telcos, the utilities, the big capex companies – they’re leveraged. So when interest rates go up, they will be structurally penalised.'
Taillardat believes, rather than focusing on the strategy centred on volatility, investors should instead adopt a portfolio approach designed to reduce such risks.
'Much like the risk-efficient strategies that emerged after 2008, we are still aiming to minimise drawdowns from equity markets while being 100% invested.
'So our “conservative” portfolios are not only comprised of low volatility stocks, but also have a low correlation to the rest of the market. This is a low risk portfolio, opposed to a low volatility strategy.'
An alternative philosophy
For Taillardat, this idea encapsulates the approach he is taking as he develops Amundi’s smart beta & factor investing offering.
'What is Smart Beta? In short it’s risk management. It’s an alternative philosophy. At its heart is the idea that if you can better manage risk, you can better outperform.’
'There is now a strong desire to better control risks and understand to a greater degree where performance is coming from.'
To capitalise on this, Amundi is in the process of developing a pure active multi-factor strategy covering the main geographical areas.
Speaking at the forum on the growth of smart beta, Amundi group CIO, Pascal Blanqué (pictured) commented: 'As classical boundaries move around between alpha and beta, the ascendency of factor investing and smart beta is redistributing assets.'
He argued that factor investing is commoditising alpha but that doesn’t mean it is any less prevalent in the market. Instead, he said, investors and asset managers need to move beyond their usual boundaries to find it.
'Factor investing is getting exposure to rewarded risks. It helps you think beyond liquid and illiquid markets, private equity for instance is a growth factor.'
Taillardat elaborated: ‘Even a very specific manager will have a systematic exposure to a single style. However, a very successful manager will be able to detect stocks that won’t be part of a style factor, instead showing a strong exposure to conviction.'
Giving those very best active managers comfort, he said: ‘Factor investing will never replace market cap indices, why? Because smart beta has less capacity.
'People are worried that market cap-weighted indices are prone to bubbles, so they’re not optimal, but we need them for liquidity.’
Closing the conference, Blanqué said: ‘Smart beta is not a free lunch, there are trade-offs and hidden risks that managers need to highlight for clients.’
Here are his top four:
1) You can’t get rid of sectoral/geographical challenges, take Japanese value as an example.
2) There is a trade-off between the freeing up of risk budget, liquidity and the cost of transactions.
3) There are practical implications to building databases as well execution challenges.
4) Bubbles - low volatility for instance has now reached very highly priced territory , we recommend quality.