Smarter Than Smart Beta
Smart Beta strategies have become increasingly popular but what are they and is there a ‘better way’?
Smart Beta have evolved from Passive investment approaches, often using ETFs as their vehicle. Passive investment approaches have delivered advisors and their clients with a very low cost exposure to markets and as such have been attracting an ever increasing wave of capital. The appeal is easy to see, a one stop low cost shop to gain exposure to a market or index. An easy concept to understand and explain.
Smart Beta differ from Passive as they look to invest in indexes constructed to take advantage of different investment factors or market inefficiencies that generate returns or Alpha. They look to do this in a transparent and rules-based methodology. For instance, Value, Momentum, Growth are the most obvious Factors that have plenty of academic evidence that support they are drivers of Alpha (excess returns). Other factors such as volatility or dividends can be used to attempt to reduce portfolio risk or meet investment objectives.
Passive approaches tend to focus on investing based on Market Cap alone. Both are rebalanced and reweighted based on set criteria (rules) with stocks removed or added once they do not meet the set criteria anymore. You would not invest in Smart Beta if you believed in the efficient market hypothesis (unless for Portfolio risk reduction or income objectives etc).
How do these approaches differ from Rules based systematic investment strategies? Simple they don’t………….
At Harbourside we run Rules-based Investment strategies. We run multi-factor based strategies that are used to construct a concentrated portfolio (we could call it an index) or 20-30 stocks typically. Equal-weighting is given to each position at the point of investment. These indexes are then rebalanced according to the rules. We believe that holding more concentrated portfolios enables us to invest in ‘the best of the best’ and sometimes there may not be enough stocks that meet our rules so we turn to cash.
Combining factors enables us to build a much more robust portfolio. Factors such as combining momentum and value can be used to help reduce portfolio risk but staying clear of significantly over valued stocks in periods of market corrections. Momentum and Growth (we mean earnings growth) typically out perform in stronger markets. You can combine all three. We always use momentum as one of our factors. Ultimately we want to invest in good companies that are at a reasonable price BUT they need to show what we call triple momentum to meet our rules. *
Our Growth strategy employs this combined factor approach. It is rules based. It is low cost. It is systematic. It maintains a concentrated portfolio. It is smart. Smarter than Smart Beta? We’ll let you decide.
- Triple momentum. In simple terms Price needs to be increasing, overall market momentum needs to be upwards and the stock needs to be showing strong relative strength against the index.
Click here to see HarbourSide Capital’s Australian Growth Strategy.