Institutional investors could be forgiven for rolling their eyes at yet another article on “smart beta.” Indeed, the hype around this topic over the last few years has been intense. Smart-beta products seem to launch daily, webinars on the topic are offered weekly, and papers roll out monthly.
Proponents of smart beta argue that it is the new cure-all. Replace your passive managers! (Solve the problems of cap-weighted indexes.) Replace your active managers! (Solve the problems of high fees.)
We believe that smart beta will follow a path similar to other strategies that once promised to revolutionise portfolio management. What does this path look like? A handful of strategies will be great successes, enhancing investment outcomes for the pioneers who embrace them. A much wider range of me-too strategies, attempting to ride the coat-tails of the latest trend, will leave behind a trail of disappointed investors.
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