Investment product development often tries to capitalize on the narrative of the day; unfortunately, once the narrative vanishes, the products soon follow. One example of this capricious practice is enhanced equity strategies. Some have survived, but we believe that’s because they’ve delivered their promise: consistency and reliable value-added.
Indeed, as Intech U.S. Broad Equity Plus passes it’s 20th anniversary, we think you’ll agree that this often-overlooked investment approach deserves a second look.
Hot to Not
At the turn of the century, enhanced equity strategies were the cat’s meow among investment professionals, as pension plans embraced their practical potential:
More mean-variance efficient than passive strategies
Easier to assess manager skill
Lower transaction costs than multiple active managers trading simultaneously
What happened?
Investors sought to capitalize on a new narrative: passive strategies for “more efficient” areas of the market and high active-risk managers that could “hunt for alpha” anywhere. Asset managers were quick to oblige, but were they too quick?
It's a Nine Inning Game
The last 20 years have been no picnic. In the face of terrorism, the global financial crisis, civil unrest, and a worldwide pandemic, trying to “hit home runs” with high active-risk equity strategies has proved tricky. Instead, enhanced equity investing has aimed for “singles and doubles” through the years. It’s a bit boring, but does it have a better chance of winning the game?
Some might see Intech U.S. Broad Equity Plus as the epitome of boring (not us, of course). While our industry rolled out concentrated, high active-risk strategies to complement passive investing, Intech U.S. Broad Equity Plus sought to eke out excess returns with a keen eye toward managing risk. Its long-term, risk-adjusted performance speaks for itself (see Figure 2).
A Little Bp Here, A Little Bp There
Because of a focus on portfolio efficiency and risk management, enhanced equity investing attempts to trade eye-popping returns for more reliable results. Since its inception on April 1, 2001, Intech U.S. Broad Equity Plus has only delivered about 61 bps of annualized excess return after fees (see Figure 3).
While these excess returns may not impress some of today’s investors, their compounding effect can have a material impact on pension funding, if delivered reliably.
You might be surprised by the effect in dollar terms. A pension with a hypothetical $100 million allocation to Intech U.S. Broad Equity Plus since its inception would have seen it grow to over $602 million versus $539 million for a passive solution (see Figure 4). Again, that’s after fees!
Well-Suited for the Newest Narrative: ESG
Environmental, social, and governance (ESG) investing is our industry’s latest narrative – and a meaningful one for our world, communities, and teams. Industry growth in this area has been nothing short of remarkable (see Figure 5). Intech’s ESG-tilt assets have grown to over US$14 billion (as of March 31, 2021) in just the last few years.
But ESG investing has the potential to introduce higher active-risk in equity portfolios, which makes integration challenging for some approaches, like concentrated strategies. Because enhanced equity strategies emphasize portfolio efficiency and risk management, the strategies are able to tactfully integrate ESG and seek a positive boost to portfolio-level ESG scores, if desired.
Learn More
We launched our first enhanced equity strategy in 1987, almost a decade after Gloria Gaynor released her well-known single, “I Will Survive.” Today, Intech’s enhanced equity platform is over US$11 billion in assets across seven different strategies (as of March 31, 2021). If you’d like to learn more about how our enhanced equity approach might fit your objectives, please reach out to us.
Composite PerformancePast performance cannot guarantee future results. Investing involves risk, including the possible loss of principal and fluctuation of value. Performance results reflect the reinvestment of dividends and other earnings. Portfolio performance results shown are time-weighted rates of return using daily valuation, include the effect of transaction costs (commissions, exchange fees, etc.), and are gross of non-reclaimable withholding taxes, if any. The composite includes all actual fee-paying accounts managed on a fully discretionary basis according to the investment strategy from inception date, including those no longer under management. Accounts meeting such criteria enter the composite upon the full first month under management. For periods of less than one year, performance is not annualized. Reporting currency is USD unless otherwise noted.
The gross performance results presented do not reflect the deduction of investment advisory fees. Returns will be reduced by such advisory fees and other contractual expenses.
The net performance results presented reflect the deduction of model investment advisory fees, and not the advisory fees actually charged to the accounts in the composite. Prior to December 31, 2004, the model advisory fees deducted reflect the maximum fixed fee in effect for the strategy. Beginning January 1, 2005, the model advisory fees deducted reflect the standard fee schedule in effect during the periods shown, applied to each account in the composite on a monthly basis. Standard fee schedules are available upon request. Actual advisory fees paid may vary among clients invested in the same strategy, which may be higher or lower than the model advisory fees. Some accounts may utilize a performance-based fee.
The Index returns are provided to represent the investment environment existing during the time periods shown. The returns for the Index do not include any transactions costs, management fees or other costs, and are gross of dividend tax withholdings.
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