Index Investing

Smart Beta: Asset Owners Survey 2016

The smart beta philosophy continues to gain ground amongst institutional investors. The speed of adoption of factor investing strategies has been impressive, with papers on these topics consistently amongst the most popular on the Savvy Investor site.

FTSE Russell's 2016 newly-released smart beta survey, below, documents the findings from interviewing over 250 asset owners around the world. This detailed 40-page paper reveals that over 70% of asset owners surveyed are currently implementing or evaluating factor investing strategies. 

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Smart Beta - Global Survey of Asset Owners (FTSE Russell, 2016)
The survey explores investor perceptions and implementation of smart beta, including the rationale for using these strategies and the methods of evaluation. The authors examine strategic versus tactical implementation of factor strategies, and discuss the evolving roles of external managers and consultants within the process.

Scientific Beta Multi-Asset Strategy: Factor Tilts and Improved Diversification
EDHEC believes that the present state of smart beta approaches provide only partial answers to the shortcomings of market cap-weighted indices. This 70 page paper introduces Scientific Beta Multi-Strategy factor indices as a superior approach to equity investing, described as "smart factor investing". The paper explores the problems of cap-weighted indices (their heavy concentration and exposure to unwanted factor risks), and examines how a suitable set of risk factors might be identified. The authors then how investigate factor tilts can be combined, to provide exposure to rewarded risks, whilst diversifying away unrewarded risks. The paper demonstrates how this approach leads to a significant improvement in risk-adjusted returns. The final chapters of the paper discuss the Scientific Beta Multi-Strategy factor indices; in particular examining their investability and robustness.

The Rise of Factor Investing: Adoption by Institutional Investors (BlackRock, 2016)
This paper examines the increasing prominence of factors and factor investing in institutional portfolios. The paper is split into four parts: Introduction; The Factor Landscape; Capital Allocation and Investment Strategies; The Future of Factor Investing. The report is based on a survey of 200 institutional investors from around the world.

A Framework for Assessing Factors and Implementing Smart Beta (Research Affiliates)
Published in the Journal of Index Investing, this article argues that the academic literature is littered with a "zoo" of apparently smart risk factors, which in practice will go unrewarded, being the result of spurious and unwarranted data-mining, The authors suggest a methodology whereby robust, investable, risk factors can be identified, which make intuitive sense and are supported by empirical research which spans geographies and time-frames, and which are not undermined by small changes to definition.

Choosing a 'Smart Beta' Factor - Not Which, But When (Northern Trust)
Recent research shows that rather than asking about which factor should be chosen, investors should ask about when they should favor each factor in order to reap the benefits of factor-based investing.

Is Smart Beta just Monkey Business? (EDHEC-Risk Institute, 2015)
The “Monkey portfolio” proposition is that smart beta strategies can be deployed naively, with the assurance that all such strategies will add value. EDHEC's research suggests otherwise, with many smart beta strategies having exposure to other factors. The authors warn that care is needed to avoid over-extrapolating the implications of a particular test specification of a smart beta strategy into a wider setting.

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