It's relatively easy to beat the market (or, why not all smart betas are created equal)!


Are all smart beta products smart? This is a question I've asked a few times over the last few years but always got a "nuanced" answer depending on the product being marketed.

A few days ago I read an interesting interview with Rob Arnott, who made the following point: "I don't think of factor tilts as smart beta. Most factor-tilt strategies start with cap weight and then put on a factor tilt. Cap weight is not smart beta. It doesn't break the link with price. And if you put on a factor tilt, the factor tilt might be smart, it might be stupid. It might be smart, but poorly timed because it's currently expensive. But it's not smart beta; it doesn't break the link with price."

His point is straightforward - if share price doubles, so does the weight in the portfolio. If share price drops, the weight follows. That's effectively buying high and selling low instead of what we all know from high school - you should buy low and sell high. Most investors today follow the market cap approach as it does offer some benefits - capacity, liquidity and the peace of mind that results from knowing you're in the same boat as everyone else. That said, increasingly investors around the world are beginning to explore alternatives to obtain a different source of returns.

Here at Premia Partners we are believers in smart beta and the separation of price and weight, yet do not see many options in Asia. We are working on a few initiatives that will make such strategies more accessible to investors into and around the region, and will share details soon. Until then, feel free to read the transcript of Rob's interview here or click contact us to sign up for updates going forward.