In a research article published in 2012 in the Journal of Portfolio Management, entitled “Demystifying risk-based strategies: A simple alpha plus beta description”, BNP Paribas Investment Partners was already demonstrating that the excess return of traditional smart-beta strategies could be explained by their factorial exposures.
Therefore, consciously choosing factor exposures to define strategies is in our view a logical way of creating persistent and diversified excess return, which is exactly the idea behind factor investing. Indeed, one can say that factor investing is the natural extension of smart beta.
From an investment philosophy viewpoint, the similarity between smart beta and factor investing can be seen in the focus on risk. Both approaches consider that one does not achieve outperformance simply by ‘looking for alphas’, but rather by choosing the ‘right kind of risks’ to take.
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