Online financial advice firm Stockspot released a report last week arguing that most ‘smart beta’ investment strategies “don’t hold up to any analytical rigour as tools for outperformance”.
“Typically, they pick a factor that has performed well in recent history and launch at the peak of that factor’s relative performance,” the report said.
Speaking to InvestorDaily, ETF fund manager BetaShares chief executive Alex Vynokur said smart beta strategies had been around for “well over a decade” with “live track records”.
“A smart beta strategy such as fundamental indexing is also strongly supported by academic theory,” he said.
“Overvalued sectors and individual securities have been empirically demonstrated to revert to the mean over time, allowing a rebalancing strategy to collect a return premium.”
Mr Vynokur said BetaShares’ FTSE RAFI Australia 200 ETF (QOZ) tracks an index of Australia’s biggest 200 listed companies, but weighted by economic size.
“A fundamental index ETF such as QOZ breaks the link between the stock’s weight in the index and its price, thereby mitigating risks that can arise at times when stock market valuations overshoot the fundamental values.
“That systematic approach of buying undervalued stocks and selling overvalued stocks, at each rebalance, has delivered approximately 2 per cent per annum over the market cap index on average in Australia for the past 15 years,” Mr Vynokur said.
In a similar vein, VanEck Asia Pacific managing director Arian Neiron acknowledged to InvestorDaily that while not all smart beta strategies would deliver what they promised, stringent testing and thorough research resulted in returns that “debunks [Stockspot’s] statement”.
“When we decide if we are going to use a smart beta index for an ETF, we explore all the academic research as well as undertaking a rigorous investigation to stress test the smart beta index.
“Our rigorous process means that we have been selective in the smart beta approaches for the respective asset classes that we launch on ASX,” Mr Neiron told InvestorDaily.
According to Stockspot’s report, citing research from Research Affiliates, new smart beta funds tended to launch “about six months after the peak in their particular strategy,” the very point at which that particular strategy was “showing its best results”.
“Unfortunately, outperformance tends to end soon after smart beta ETFs are launched,” the report said.
But Mr Neiron revealed data that demonstrated VanEck’s Australian Equal Weight ETF had outperformed the S&P/ASX 200 Index over a period of one, two and three years and beyond.
Source: VanEck
Mr Neiron argued that equal weighting, which gives the same weight to all stocks in a portfolio, “is supported by academic and commercial research, from the likes of S&P, London’s Cass Business School, MSCI, EDHEC, Goethe University and our own CSIRO and Monash University”.
“It has outperformed since its inception, well beyond the six months suggested,” he said.
Additionally, quality investing was backed up by “a plethora of research” and constituted part of Warren Buffet’s investment mantra, Mr Neiron added.
“The Australian experience is matching the research and again isn’t consistent with the research Stockspot cites.”
