Tagged: smart beta

Smart Beta

“Management wants answers when we don’t trade with our peers.” This is a lyric from a song by the rock band Smart Beta.

Just kidding. But Smart Beta is as good a rock-band name as One Direction and each begets the other in the stock market. Because capital-markets globally have become variations on a barcode theme – call it one direction – investors are experimenting with ways to break away.

Just yesterday you could see a currency patina painting worldwide equities, with some Asian markets up equal to declines in European stocks. Then when US shares began trading, ours were both up and down, a sort of global convergence.  As currencies fluctuate, divergences spill into assets denominated by them, feeding short-term arbitrage. It’s still a pattern.

Back to the opening salvo, it’s a routine refrain: “My CEO wants to know why we’re down and our peers are up.”  Patterns vex not only IR folks trying to answer management but the scads of money entrusted to fund managers promising as they all do to “outperform the market.”

Enter Smart Beta.  Some call it “factor-driven investment,” others “strategic beta.” Beta in investment-speak defines comparative performance so smart beta implies better comparative performance. Beta 1.0 defines behavior for the whole market. Figures above or below 1.0 signal a security’s historical tendency to be more or less volatile than broad measures.

We get all that, right? It’s outdated. Beta no longer captures volatility well since any widely traded stock will have thousands of daily prices, the final one the closing price. We prefer to measure intraday volatility.

And our hunt for better metrics is like quantitative effort to break from the Blackrock/Vanguard pack. That’s smart beta. Vanguard itself is toying with the concept through funds like the Vanguard Dividend Appreciation ETF.  Founder Jack Bogle nonetheless scoffs, telling CNBC’s Tom Anderson in a March 2015 story, “Active managers are just trying to come back and say there is a better way to index, when they know damn well there isn’t a better way.” (more…)