• Sensible index construction
The factors selected must be well-considered. They should be either durable predictors of return, or if not durable, there must be scope to adjust factors over time in a transparent way. Alternatively, factors may not target outperformance but some quality of return that investors demand (for example, high income or low volatility).
• Capable people
Those behind the strategy must have an understanding of financial theory, market reality, as well as expertise in trading/execution.
• A wide investment universe
An advantage of strategic beta is the ability to use computers to process a wide array of information. For example, RealIndex can quickly compare the price/book and price/earnings ratios for every major stock in the emerging markets universe. If there is only a small universe, or the universe is skewed, active managers may be better equipped. The Australian market, dominated by a handful of banking and resource stocks, is vulnerable in that regard.