Smart beta basics

Smart beta is an umbrella term that’s attached to many strategies, so it can be hard to pinpoint what they all have in common.

But even though strategies vary, they have several shared features, says Adrian Banner, CEO and CIO of INTECH Investment Management. He manages the Renaissance U.S Equity Fund.

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Every smart beta strategy is based on tracking broad collections of stocks. And instead of adopting cap-weighted methodologies, managers use “a systematic, rules-based reweighting” approach when handling these groups of securities, he explains. Examples include fundamental, equal and value weighting.

Banner adds reweighting methodologies vary, but “what’s important…is the idea [of smart beta] is actually quite old. More than four decades ago, people were already studying and, in some cases, implementing equal weighting” when using indexes. They were consistently investing “the same amount of capital in every security” held rather than prioritizing larger companies.

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If you maintain an equal-weight portfolio, you’re rebalancing that portfolio diligently and consistently, says Banner. “As companies go down, you’re able to buy low,” and vice versa, he adds, which is what makes smart beta strategies attractive. They’re also relatively low-cost and transparent.

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But there are risks to consider, such as lack of trading control and efficiency. “Some of the [newer] smart beta strategies may have risks that aren’t well understood” even though they may outperform in the long term, says Banner.

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Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.