Smart Beta Investing May Not Be So Smart

A new study has raised questions as to whether smart beta mutual funds, which are on course to reach $1 trillion in assets by the end of 2017, are as “smart as they claim to be,” according to a recent article in the Financial Times. The article quotes University of Finland finance professor Antti Suhonen, who led the research, from his report (published in May): “Investing in smart beta does require good investor education, due diligence, monitoring of the investment and, most importantly, a strategic and realistic setting of investment objectives for the strategies.” Suhonen’s study examined 215 strategies developed […]

Indexing Beats Smart-Beta Track Record

Many smart-beta funds– which develop portfolios focusing on various factors such as low volatility, value, or momentum– have underperformed the market, especially after accounting for fees and expenses. This according to a recent MarketWatch article which concludes, “Tally another point in the pro-indexing column.” While the article points out that the rate of outperformance depends on the time frame analyzed, it says that “broadly, only 30% to 40% of smart beta exchange-traded funds beat their benchmark on an absolute basis, while only 25% to 32% do on a risk-adjusted basis” (data provided by UBS). According to the article, the absence […]

Rob Arnott Questions Use of the Smart Beta Strategies He Pioneered

Rob Arnott, founder of Research Affiliates LLC, published a paper earlier this month in which he questions the use of some “smart beta” investment strategies he pioneered, according to a recent article in The Wall Street Journal. Arnott, known by many as the “godfather of smart beta,” says the popularity of some passive-investing strategies are making them expensive, and has “built tools that he says will help investors determine which strategies are overpriced.” In the paper, titled “How Can ‘Smart Bet’ Go Horribly Wrong?” Arnott singles out low-volatility funds, saying that inflows have driven up valuations which, in turn, are […]

Simple is Smart in Smart-Beta Investing

Using a database of over 20 countries, a team of British academics tested the five most popular smart beta factors to see whether they would have proven successful over time. This according to a recent article in the Financial Times. The factors studied and respective finds are as follows: Low-risk: the highest returns “come from avoiding the riskiest stocks, rather than seeking out the least risky.” When divided into quintiles going back to 1963, the article explains, the highest-risk portion returned only 4.1 percent while the other four returned at least 10.9 percent. Momentum: Returns were volatile but, over time, […]

Rob Arnott Says Clock is Ticking on Smart Beta ETFs

A smart-beta pioneer, Rob Arnott of Research Affiliates warns that these investment vehicles are in a bubble, says an article in last week’s Bloomberg. Smart-beta ETFs organize securities based on quantitative factors like volatility or “cheapness”, and the article explains that Arnott’s position is nothing new (he publicly battled with Cliff Asness on the topic a year ago). In fact, his firm’s website (Research Affiliates specializes in “cheap-stock” ETFs) offers investors a tool to gauge which funds are “about to pop” and has created a line of indexes that adjust holdings based on variables such as valuation. According to the […]

Is Smart-Beta Investing Smart?

Smart-beta investing is getting a lot of attention and Chris Brightman, chief investment officer of Research Affiliates, has covered a lot of ground in this territory. However, while this investment methodology has been gaining popularity, Research Affiliates is warning investors that a crash may be coming. In a recent interview with Barron’s, Brightman shares his thoughts and concerns on the subject. Unlike traditional market-weighted indices, smart-beta investing uses measures such as volatility, valuation and earnings to create funds. Research Affiliates has applied years of research in this space to create index funds for companies such as Pimco, Invesco PowerShares and […]

Are Formula-based Investment Strategies Necessarily “Smart”?

The word “smart” is thrown around a lot these days to describe phones, tables, and a host of other gadgets intended to make our life easier.  But, as we know, the mere existence of capabilities doesn’t necessarily mean those capabilities work well. Rob Arnott, founder of Research Affiliates, discussed this as it relates to the “smart beta” investment strategy. “Smart beta” describes a portfolio-building strategy that focuses on a company’s fundamentals (such as revenue, book value and cash flow) exclusive of its market capitalization. Arnott asserts that because the methodology is applied doesn’t ensure it will be successful. Like all […]

Asness vs. Arnott on Smart Beta, Factor Timing, and Performance Chasing

Cliff Asness, co-founder of AQR Capital Management, added fuel to the debate over “smart beta” investing with a recent paper attacking arguments made by Rob Arnott of Research Affiliates. Arnott, once understood as a proponent of smart beta approaches due to his research and development of fundamental indexing, claimed that many smart beta exchange traded funds “have succeeded solely because they have become more and more expensive.” In an argument that Asness describes as alarmist, Arnott suggests that a significant fall in such funds is coming. While Asness does not necessarily disagree with that point, he reads Arnott to be […]

Why Smart Beta May Not Be So Smart Right Now

The “smart beta” investing movement has gained a lot of followers – and fund inflows – over the past few years. But now there are signs that the influx of money into these approaches may be leading to big trouble, Validea CEO John P. Reese writes in his latest column for Canada’s Globe and Mail. While traditional index investing involves weighting holdings by their market capitalizations, smart beta approaches often use quality metrics such as profits, debt levels, and share volatility to weight stocks within the index. Reese notes that Rob Arnott – a pioneer of the smart-beta movement — […]

Rob Arnott of Research Affiliates Says a “Smart-Beta Crash” is “Reasonably Likely”

MarketWatch reports that Rob Arnott, chairman of Research Affiliates, says that smart beta has now become so popular that it is dangerous. Arnott, whose research helped to fuel interest in smart beta funds, says that a “smart-beta crash” is “reasonably likely.” Smart beta funds have focused on stocks with characteristics such as low volatility or high momentum, spurred on by data showing that such strategies would have yielded high returns if employed historically. Now, however, proliferation of investment strategies based on this research has increased prices of relevant stocks significantly due to heightened demand. MarketWatch states that, worse, people “then […]

The Risk of Investing in “Smart Beta” Funds

Writing in the Wall Street Journal, Jason Zweig cautions readers against blindly investing in popular “smart beta” funds. He notes that a recent Research Affiliates study suggests “their low risk in the past may lead to higher risk in the future.” These “smart beta” funds are “backed by research purporting to show [they] ha[ve] beaten the market.” Assets invested in such funds has tripled over five years, to a total of $565 billion in 2015.  Robert Arnott of Research Affiliates says that “much of the money is chasing recent past performance.” For example, some funds are based on “low volatility” […]