While many institutions and advisors have put money into smart-beta vehicles, there are as many asset managers and industry observers who are skeptical, to put it mildly, of smart-beta proponents’ claims.
Among them is John Bogle, who in a video interview with Morningstar’s Christine Benz last year came out swinging against smart beta, calling it a “marketing gimmick” that will only benefit the denizens of Wall Street. When asked what he thought about smart beta, Bogle responded by saying, “If I had to give you one word for it, Christine, it would be silly. We’re trying to put a fancy name on something. I think everybody would think they want ‘smart beta,’ whatever that is, but there is no ultimate answer to that. There is no smart beta for everybody; let’s understand that very clearly. Beta is 100, and if smart beta gives you 105, dumb beta, for the want of a better expression, is going to give you 95, but in most cases at less cost.”
Bogle added, “’Smart beta’ is like saying ‘smart manager.’ Everybody wants a smart manager, but the average manager on average is average. So, it’s a marketing gimmick, I would call it.”
In a Jan. 4 article in Barron’s, staff writer Reshma Karpadia neatly summed up the naysayers’ nits. “The trouble is that there are too many different strategies in the mix to warrant a category label that implies cohesion—especially since many strategies are still unproven.” She then cited an advisor favorite among asset management firms—Dimensional Fund Advisors—as “the grandfather of smart-beta strategies,” but qualifies that moniker by saying DFA’s fund are “based on decades of exhaustive research.”
Skeptics come from both the active and passive sides of the investing debate, including Cliff Asness of AQR Capital Management, James Montier of fund manager GMO, Joel Dickson of Vanguard and Rick Ferri of Portfolio Solutions Inc., who in a gathering of the John Bogle fans called “Bogleheads” last year reiterated Bogle’s assessment of smart beta as “silly,” according to a Wall Street Journal article by Karen Damato and Ari Weinberg. “Beta is just beta,” Damato and Weinberg said he told the group.
Global consulting firm Towers Watson reported in mid-February that its institutional investor clients (pension funds, sovereign wealth funds and insurers) were putting plenty of money in smart-beta portfolios. It also expressed some misgivings about those strategies’ fund-gathering success. “While it’s satisfying that our clients have been able to benefit first from a range of smart-beta strategies,” said Craig Baker, global head of investment research at Towers Watson, “we are somewhat concerned about the proliferation of products now on the market that claim to be smart beta, particularly in the equity area.”
A June 2013 paper by the EDHEC-Risk Institute warned of multiple system risks inherent in smart-beta strategies, and called for the release of data that would enable investors to accurately measure the risks and performances of smart-beta strategies “at a cost that is not prohibitive and […] without any particular restrictions on usage.”
Rob Arnott isn’t gainsaid, however, by critics. While he acknowledged that “smart beta is a controversial term, incorrectly attributed to” Research Affiliates, he argued that “it’s not academically correct” to say “there’s no such thing as smart beta.” Arnott said, “Fundamental indexing has some intellectual rigor; it captures something tangible and has theoretical merit.”