Two Thoughts on Smart (or Strategic) Beta
A few weeks back I commented in a story on OppenheimerFunds’ move into the smart (or strategic) beta realm. Let’s be generous and say that my quote was among the more generic in the story. So I thought I’d take a second to lay out two thoughts based on points within the article.
1. Smart beta WILL be successful
The parade of managers lining up to launch smart beta strategies is a pretty good indication, despite some mixed results in asset gathering. The simple fact though is that there is a sizeable gap between the philosophies of traditional active and passive strategies. There is no reason that strategies that include elements of both shouldn’t be successful as well. The idea that these strategies are solely a marketing gimmick is disingenuous.
If the asset management industry is a (somewhat uneven) barbell with passive at one end and active at the other, I believe the eventual (long-term) outcome is a more evenly-distributed pipe where the middle has significant or even as much traction as the endpoints.
2. Smart beta should align itself with active
To some degree I’ve always felt that the “passive” label for investments is a misnomer. These are still purposeful strategies designed by human beings based on their ideas. So while the day-to-day decision-making on holdings are removed from a portfolio manager, the underlying guidelines remain very much human. These are not robotic strategies divorced from the thoughts of people.
This is even more evident with smart beta strategies, which exist wholly because people think they can improve upon (or at least offer alternatives to) traditional passive. Many smart beta managers regret the prevalence of the word ‘beta’ in the category name; even so, few push to align these strategies explicitly with active. That should (and I believe will) happen more, especially since many of the market entrants are traditional active players. If nothing else, it’s a more accurate way to present what these strategies are.
[ Image courtesy of ValueWalk ]