Bolster Your Returns with Smart-Beta: Fact or Fiction?

Today’s investors seek returns that beat the market consistently. In search of these returns, some investors find “smart beta”, low-cost, investment devices to perform well to produce the yield they seek.

These funds cost less than traditional managed funds, yet produced better returned that than most index funds, thereby making them an attractive investment device. Many investors have shown interest in this approach. However, some still remain skeptical of this investment strategy. Burton Malkiel, who is a senior investor in funds and has written a book on market trends doubts the efficacy of this model. Smart-beta indexes are popular because of their efficient marketing strategies and not for their profit potential.The exact composition of smart beta schemes is not clear. Even Towers Watson, the investment agency, which is said to have coined the term, has also shifted its classification of the investment apparatus. The conventional idea of smart beta is that it provides a more lucrative approach to available higher beta investment options. For instance, it provides lower-cost exposure to the market that is not judged by the capital generated on the exchanges.

Market indexes which are not based on their capital generation are made popular by external promoters such as Research Affiliates. These index funds are judged by the commercial aspects of the firms such as sales figures, cash flow and dividends. A firm like Research Affiliates manages $177 billion globally. Indexes which are judged on similar patterns are also equally visible, for their versatility, low volatility and low correlation. Watson suggests that smart beta is equally good to understand investment plans that provide investors with tailored coverage of different schemes or risk factors. He does consider them to be difficult to exercise, though.

Smart beta appears to be in direct management, as it is a cheap, rules-driven form of speculation, but it is equally riskier to lose active managers’ earning potential, as it provides outperformance potential at a rate better than index funds. One can disagree that smart beta has been developed from the concept of developing a prime, low-risk portfolio tool. Investors may be surprised by the label of smart-beta and the low-cost of entry compared to most conventionally active funds.

Investors who look for a way to profile and opt for the best-return funds can possibly earn better profit margins than others who simply focus on price first. Amin Rajan, CEO of Create Research, states that experts do often doubt smart-beta mechanisms for their inability to remain competitive against steady market fluctuations. But, no other investment tool has performed it either, he asserts.

The CEO also has forecast that European pension funds would invest more in smart-beta fixed income and equity offerings, yet concedes that smart beta is not a full-proof item with no risk. He recognizes the sound performance of the investment tools since the troughs 0f 2008, though. Smart beta can build on the price inconsistencies brought in by central bank decisions that cause stock prices to fluctuate from their fundamental value. Some investors are worried about the risks  that some large-cap stocks involve, interns of possible overvaluation.

Nevertheless, given the bevy of investment vehicles in the market today, a prudent approach to smart-beta investment options may prove fundamental in bolstering the performance of an investor’s portofolio.


One response to “Bolster Your Returns with Smart-Beta: Fact or Fiction?

  1. Pingback: Asset Management: ‘Smart beta’ drives down active management fees | Alpha Banker·

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