The search for....Smart Beta

Sounds rather like a hollywood film title but portfolios are increasingly looking for this. It's the extra value that drives performance in the portfolio.

One example of this, is to buy the equity in firms that seek to create value by buying back their shares.

At a time of low bond yields and returns on money in the bank, any firms which are generating more cash than they need are likely to be highly prized, as they can then reward shareholders by returning this liquidity to them.

Buybacks are therefore in vogue and a report by Saxo Bank, asserts that the 100 S&P 500 constituents companies who spent the most on share buybacks, as a percentage of market cap, have outperformed the US benchmark index by around two percentage points in 2014. 

A way to access this without paying fees to a fund manager is Invesco's PowerShares Global Buyback Achievers UCITS ETF listed on the London Stock Exchange.

This makes the launch of the PowerShares Global Buyback Achievers ETF particularly timely. The instrument tracks a basket of securities which comprises the constituents of both the NASDAQ US Buyback Achievers and the NASDAQ International Buyback Achievers indices.

The NASDAQ US Buyback Achievers Index is comprised of corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing twelve months. The NASDAQ International Buyback Achievers Index is comprised of corporations that have effected a net reduction in shares outstanding of 5% or more in their latest fiscal year. The International Buyback Achievers index was launched on 12 December 2013 and the Global Buyback Achievers benchmark this August

In the coming years, it will be fascinating to see how PowerShares Global Buyback Achievers ETF performs relative to the SPDR Global Dividend Aristocrats ETF, which has the EPIC code GBDV. Clients will doubtless be delighted if it can deliver the gains and outperformance offered by the NASDAQ US Buyback Achievers index since its inception in 1996.

This in turn echoes sentiments expressed by master investor Warren Buffett, who in his 2012 letter to Berkshire Hathaway shareholders wrote: “Charlie [Munger] and I favour repurchases when two conditions are met: first, a company has ample funds to take care of the operational liquidity and needs of its business; second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated.”

It is unlikely investors have the time to assess every buyback or dividend payment plan so active or passive funds which target income or buybacks serve a valuable purpose. In the case of the latter, the PowerShare ETF's basket of stocks will contain some firms where the buyback does make economic sense and perhaps others where management teams are doing little more than goosing the earnings per share (EPS) metric, if only so they can cash in their stock options as a share price is pumped higher. 

ource: Investcentre