In terms of types of money management, it seems that the names are increasingly being narrowed down to three types: beta, smart beta and active. The evolution of the distinction between beta and active began to occur in 1960s. The type of portfolio management that today is called “smart beta” has been around since the early 1980s.
Today, smart beta is emerging as the fastest growing type of investment management. It is predicted to grow up to $6TN in institutional assets over the next five years (Financial Times, Sept. 6, 2013).
INTECH Investment Management has recently published a series of papers on smart beta:
• Smart Beta Series Part 1: Shiny New Name or Genuinely New Idea?
• Smart Beta Series Part 2: When Smart is Not that Smart
• Smart Beta Series Part 3: From Smarter Beta to Smart Alpha
The title of each article in this series provides one with the sense of the terrain the authors intend to cover. Each part of the series builds on the previous paper and is designed to be easily read in one sitting. It helps to digest one before moving to the next one in the series.
A few observations from reading these papers:
• Smart beta is a type of investing that has been around for over 30 years but often under different monikers, such as “enhanced indexing” or “rules-based investing” to name a couple.
• Smart beta is becoming a catch-all phrase for money that is not actively managed or passively managed (based on a cap-weighted index).
• Smart is not the best nomenclature to describe what are essentially rules-based investment strategies in that the name assumes that “smart beta” is better (e.g., greater return with lower risks) than other investment strategies at all times.
• The authors contend that smart beta carries many of the same risks as beta. They do not see it as an either/or. Instead, they focus on when might be the right time to deploy a given strategy knowing the current market conditions.
• Finally, it is apparent that investment advisory oversight is important to determine how to most efficiently deploy smart beta via the equity portfolio construction process.
Given the proliferation of smart beta investment constructs, plan advisors will benefit from this somewhat in-depth (but not over the top) examination of this rapidly expanding approach to portfolio management.
