Moving on from index trackers – Dutch discover factor investing

In no man’s land

So-called smart beta strategies, index trackers with a tilt to a specific factor such as volatility or size, are not receiving a particularly warm welcome from Dutch fund selectors, despite intense efforts over the past couple of years by large fund houses to change their mind. “Smart beta funds charge 60 basis points more than plain vanilla index trackers. They are simply too expensive,” says Bosma.

Bouma doesn’t invest in smart beta funds either, saying: “Large fund houses with a wide range of passive products simply pour a smart beta sauce over these products to make a higher margin. We haven’t yet seen any products which justify these higher fees.”

Freddy van Mulligen, who is responsible for external manager selection at pension investor Syntrus Achmea Asset Management, one of the largest institutional investors in the Netherlands, is convinced of the added-value factor investing can offer, but smart beta is just not good enough for him. “For us, an index which is composed of simply the stocks with the lowest volatility is not satisfactory,” he says.

Smart beta 2.0

So Syntrus Achmea takes a different approach, focusing on active factor investing. It has invested about 30% of its equity portfolio in passive index trackers, and has designed its investment process for the active part of its equity portfolios around the same factors as smart beta index trackers: volatility, value, momentum, quality and size.

However, Van Mulligen believes in active managers, rather than in index trackers with a factor bias. “A manager only gets a chance with us if he is a factor investor himself,” he says. “We want an active manager who, for example, also can make a substantiated choice between two companies with low volatility. “Passively managed smart beta funds, on the other hand, have a rigid set-up. They are based on quantitative and often arbitrary assumptions. So if you choose a fund like that, you will be stuck with those for years to come.”

What gives Syntrus Achmea an edge compared to wholesale investors is its sheer size. The company has more than €70bn in assets under management and uses just 10 different managers for the whole active part of its equity portfolio. “Because of this scale, the manager fees we pay for our equity investments never exceed 0.5%. If I negotiate really hard, I might even get the fees down substantially lower.”

Sven Smeets, managing director at Altis, another large institutional investor in the Netherlands which is part of asset manager NN Investment Partners, also appreciates the merits of factor investing. The company has been using a core-satellite approach to its equity investments for more than a decade, with 50-60% of assets invested in index trackers and the rest in very active funds.

But it is now in the process of redesigning its investment process, replacing the index-trackers in the core of the portfolio with more active factor-based strategies. “Market cap-weighted index trackers are based on just one factor, market capitalisation, so they have a tilt towards large caps. This makes them susceptible to market bubbles,” he explains.


Since Altis’ clients are institutional investors, it has a very long investment horizon. Smeets and his team therefore realised that ETFs, which are mainly appreciated by investors as handy tools for tactical asset allocation, are not the most appropriate instrument for them.

Part of the Bonhill Group.