‘Smart Beta’ is an investment strategy that is a ‘sort of halfway house’ between a passive investment approach, where a fund manager simply buys all the stocks on a particular market in proportion to their size, and an active fund where the manager selects a sliver of stocks from an index.
Smart Beta funds buy all of the stocks, but not in proportion to their size. The Monro VT Smart Beta fund buys all of the stocks in the IA UK All Companies sector, weighted towards the biggest dividend payers.
The fund looks at the average analysts estimate for what the dividend payout will be twelve months ahead, so as not to get caught up in short term negative noise about a stock, effectively looking at the dividend potential for the company a year hence, rather than the share price movements in the near term.
This means the fund was buying BP and Shell when the market was selling, and has recorded significant gains as the oil majors paid increased dividends. The same applied with his shares in the commodity company Anglo American.
He believes that active fund managers struggle to add much value when it comes to the largest stocks on the market. ‘They go and meet the management of the companies, and the management tell them only things that are publically available information anyway. The market is actually quiet efficient when it comes to the largest companies, when things go wrong, it tends to be something that no one can predict anyway.’
The fund pays a 4 per cent dividend yield, and has started to pay monthly dividends.