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Smart Beta: The Facts

Cass has produced a series of papers for Invesco PowerShares looking at the origins, the source of performance and due diligence challenges of Smart Beta.

Cass has produced a series of papers for Invesco PowerShares looking at the origins, the source of performance and due diligence challenges of Smart Beta. 

Smart beta is a transparent, rules based weighting scheme that is different from market capitalisation weights.

Co-author, Professor of Asset Management, Andrew Clare said: "We felt that this research was necessary. The number of smart beta investment products has ballooned over the last few years and many investors have been dazzled by this proliferation and choice. Our papers will hopefully help investors understand the opportunities that smart beta investing offers, along with the pitfalls and risks."
 
The four papers examine in depth the origins, the source of performance, and the monitoring challenges that Smart Beta presents:

  • The first paper looks at the origins of Smart Beta.  While the modern stock market index is usually traced back to the creation of the Dow Jones Industrial Average in 1896, it was the work some 60 years later of Harry Markowitz who introduced the world to the phrase ‘Modern Portfolio Theory’ in the 1950’s and the work of Eugene Fama which introduced the investment world to the notion of the Efficient Market Hypothesis (EMH) that essentially formed the intellectual basis for a style of investing that has become known invariably as ‘passive investing’ or ‘index tracking’.
  • The second paper focuses on the empirical evidence for Smart Beta investing examining the performance of some relatively well known, commercially available Smart Beta investment strategies. Having analysed the performance of some of these investment approaches, the paper then investigates the source(s) of their performance.
  • The third paper extends the study to look more closely at 9 Smart Beta, US equity strategies that have been transformed into financial market indices by S&P and asks whether combinations of them could generate a more attractive risk-return profile for investors than could be achieved by investing in a market cap-weighted US equity portfolio. In essence it looks for evidence that ‘smart US equity portfolios’ can be built from Smart Beta components.
  • The final paper explores the challenges of investing in individual Smart Beta funds or ETFs, or indeed portfolios of these investment vehicles. It also explores the challenges involved in monitoring the performance of smart beta investments, by contrasting these with those posed by investing in traditional, active mutual funds.

The four papers can be found here.

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