It has been argued that all smart beta strategies generate positive exposure to value and small-cap stocks in much the same way as randomly generated portfolio strategies do. And that it is this that explains their outperformance.
It has been argued that all smart beta strategies generate positive exposure to value and small-cap stocks in much the same way as randomly generated portfolio strategies do. And that it is this that explains their outperformance. It has even been argued that smart beta strategies with inverted stock weights – that is, those that do not weight stocks proportionally to their book value but proportionally to one divided by their book value – perform similarly.
In this Edhec paper* the authors challenge these views. They show that, although some strategies such as fundamental equity indexation may perhaps be mostly driven by a value tilt and may generate similar performance to their inverted counterparts, many smart beta strategies take exposure to additional factors, and that there can be pronounced differences in factor exposures across different strategies.
Moreover, and perhaps most reassuringly, the inverses of these strategies generate lower returns. We fully agree with the authors’ views and hope that, with this paper, the myth about smart beta monkey strategies has been debunked once and for all.
*Amenc, Goltz & Lodh, “Smart Beta Is Not Monkey Business”, Journal of Index Investing, Vol. 6, No. 4, 2016, pp. 12-29.
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