Wells Fargo Asset Management, until recently one of the few large managers without quantitative investment management capabilities, is planning to roll out a lineup of smart beta funds following the closure of its acquisition of Los Angeles-based quant shop Analytic Investors back in October.
Wells Fargo’s acquisition of privately held Analytic gave it instant access to quantitative techniques, the engine behind smart beta funds. As such, Wells Fargo is preparing to launch a number of smart beta mutual funds early this year based on portfolio construction concepts outlined in a paper that Harindra de Silva, the founder of Analytic, published in the November/December 2016 issue of the CFA Institute Financial Analysts Journal. The paper, entitled “Fundamentals of Efficient Factor Investing,” was co-authored with Roger Clarke, the chairman of Analytic, and Steven Thorley, a finance professor at Brigham Young University’s Marriott School of Management. These will be brand-new strategies for Analytic and the first time the firm’s investments will be available to retail clients. Wells Fargo was not available to comment on the new offerings by publication time.
Smart beta is one of the fastest-growing investment categories in finance, as asset managers look to offer passive alternatives now that investors’ love affair with low-cost index funds that track ubiquitous benchmarks like the Standard & Poor’s 500 remains unchecked.
Although there isn’t one standard definition for these strategies, factor and smart beta funds are broadly based on a set of rules, programmed into an algorithm, to provide exposure to given characteristics — say, value or low volatility. Once the model is defined, humans don’t get involved.
Smart beta investments, which most people consider passive strategies because they follow a model, have benefited from the trend toward indexing. The traditional index funds business is dominated by three huge providers: BlackRock, State Street Global Advisors and Vanguard Group. Asset managers think the smart beta sector is still open for new competitors that can put their individual stamp on the offerings. Among the big players to date are AQR Capital Management, Goldman Sachs Asset Management, Northern Trust Asset Management, PanAgora Asset Management, and State Street Global Advisors.
De Silva founded Analytic in 1970 and grew it to $15 billion in institutional assets by the time Wells Fargo purchased the firm. Analytic offers three benchmark-oriented equity strategies that systematically analyze dozens of factors that affect stock prices, as well as U.S. market neutral, global long/short, low volatility, and covered call portfolios. De Silva continues to lead the development of the firm’s investment process and focuses on research for equity and factor-based asset allocation strategies.