how much money continues to be invested in smart beta by
pension funds and via the explosive global growth of exchange
traded funds, there is regrettably little independent research
into how well strategies perform.
managers and others promoting the strategies do of course have
back-tested models, which show prospective clients what they
might expect in terms of out-performance, but it is hard for
the client to tell whether this is smart investing or smart
independent research is scarce but it is scarce for a reason.
To be useful it has to look at performance over the very long
run. Few academics have easy access to the required data
there are exceptions. When all three were at London Business
School Professors Elroy Dimson, Mike Staunton and Paul Marsh
began to compile what is now the
world’s most comprehensive study of the
long-run behaviour of equities and bonds.
burst on the scene with Triumph of the Optimists published in
2000, which charted how equities had trounced bonds over the
last 100 years in London and the other major markets. The
database has been extended each year since and their work now
takes in most of the world’s major
set out to answer two questions: is smart beta really smart and
is smart beta persistent? And, can the factors that tilt a
portfolio deliver lasting outperformance? The results appear in
the recently published Credit Suisse Investment Returns
300 different factors have been isolated over the years and
obviously they could not test every single one. Instead they
focussed on the five most commonly used – value,
momentum, size, low volatility and income.
of all they plotted these on a grid to grade performance since
2008. These last 10 years show considerable volatility. What
they found however was that a factor which drives performance
one year may well fail to do much the next.
over the 10 analysed years the low volatility factor delivered
three years of top quintile performance, three years in the
bottom quintile and four around the middle. The size factor
delivered three years at the top but only one year at the
also had three years at the top and one year at the bottom.
Value had one year at the top and five years at the bottom.
Income never made it to the top, but was never at the bottom
spent all 10 years in the middle three of the quintile bands
with a bias towards the lower.
the 10 years most factors had their time in the sun. But there
was no persistency and no pattern and no way of knowing in
advance which was likely to do well.
of course, the analysis ignores the impact of costs. Some smart
beta strategies require a large amount of dealing, others in
the long-short space can be difficult to construct. Theoretical
outperformance may not be achievable.