What's smart about smart beta?

Sometimes it’s hard to find good quality events which are genuinely able to be described as continuing professional development, or continuing professional education.  Too many of the events I attend are badged as CPD, but when you get there are little more than thinly veiled efforts at product promotion. 
But the Vanguard Symposium is one of the occasions when I know I will find good quality and thought-provoking content, and yesterday’s event in London was no exception. 

The opening presentation discussed asset allocation, with the general conclusion that if you have bought into all of the logic behind passive investing then a good long term asset allocation to suit the client’s risk profile, capacity for loss and long term objectives should be more then adequate.  Which is to say, stop tinkering. 

The second speaker from Morningstar discussed how they rate passive funds, but disappointingly they don’t rate ETFs.  Considering that ETFs have very many more features in strategy, construction and administration that could make them significantly less suitable for clients I found it a little odd that Morningstar would rate funds, but not ETFs.  Perhaps while institutional investors remain the primary purchasers of ETFs such analysis and rating is surplus to requirements.

The third presentation from the States discussed Smart Beta.  Now this was really interesting.  No, really it was!!  For a very long time I have argued that Dimensional funds are not passive funds.  They are not index trackers.  They are, as the speaker noted, alternatively weighted.  Yes, there may be loads of evidence that value and smaller companies drive above average performance, but they are still skewing the index when they include some of these companies and exclude others. 

And now, you’re no-one unless you are launching a Smart Beta fund, basing your investment selection on some criteria or another that is likely to enhance returns.  Now, while the mechanised nature of this investment selection could mean that the funds are cheaper than traditionally managed active funds, the salient point of the presentation was this :
  • now that there are so many ways of “alternatively weighting” the indices in which you invest, advisers are now making as many choices for clients as they used to make when selecting active funds.  OK, this approach may be cheaper than active investing, but advice is still subject to deciding which index, created in which way, analysing which metric, is going to come up with the goods for the client. 
And as with the asset allocation commentary above, if you have really bought into the case for passive investing, what is your logic for selecting one or other Smart Beta fund over an index fund, or an active one for that matter?    
Gill Cardy, 06/06/2014