Smart beta not quite as clever as marketed

 

 

A screen shows the market movements as traders work on the floor of the New York Stock Exchange on January 7, 2016.

Has the investment industry's marketing push outsmarted itself? For several years, huge effort has gone in to selling "smart beta" funds. It has worked, creating great excitement. Now, not at all surprisingly, the backlash has begun.
Investment theory may be a tad crunchy for Easter weekend, so let us keep this simple. Beta is the academic term for the return you get from passively investing in an index. Smart beta comes up with a strategy to beat the index, which can itself be made into an index with simple rules.
The advantage of doing this is that funds that track an index can be run far more cheaply than active funds, which face a far higher bill for research and managers' salaries. So if a winning strategy can be reduced to an index, it should be possible to cut costs, and offer a superior return to investors.
Passive investing is popular at present because investors have worked out that low fees matter. So smart beta offers a future for active managers.
Smart beta strategies are now proliferating but most commonly stem from anomalies identified in the academic literature. Perhaps most importantly, there are Value (cheap stocks do better than expensive), Momentum (winners keep winning, and losers keep losing), and Low volatility (relatively stable stocks perform better). All will have periods when they do badly. All perform well in the long run. Other popular strategies involve weighting portfolios by companies' sales, or revenues, or dividends.