Acknowledgments xiii
Disclaimer xv
Introduction 1
Part I Overview of Equity Smart Beta Space
Chapter 1 Evolution and Composition of the Equity Smart Beta Space 11
I. Introduction 12
II. Evolution of Equity Smart Beta 13
III. Desired Characteristics of Smart Beta Strategies 19
IV. Composition and Definition of Equity Smart Beta 21
V. Typical Investor Questions 21
VI. Conclusion 30
Part II Equity Common Factors and Factor Investing
Chapter 2 An Overview of Equity Common Factors and Factor Investing 35
I. Introduction: What Are Equity Common Factors? 36
II. Evolution of Equity Common Factors and Factor
Investing 37
III. Typical Investor Questions 49
IV. Conclusion 53
Chapter 3 Explaining Smart Beta Factor Return Premia 55
I. Introduction 56
II. Data Mining 57
III. Risk-Based Explanations 58
IV. Behavioral Explanations 59
V. Structural Explanations 62
VI. Typical Investor Questions 63
VII. Conclusion 68
Part III Capturing Smart Beta Factors
Chapter 4 Weighting Schemes 71
I. Introduction 73
II. Weighting Schemes Used to Capture Factor Returns 73
III. Assessing the Investment Performance and Efficiency of Weighting Schemes Used to Capture Factor Returns 82
IV. Typical Investor Questions 96
V. Conclusion 101
Chapter 5 Factor Specifications 109
I. Introduction 110
II. Value 111
III. Momentum 114
IV. Low Volatility 115
V. Quality 116
VI. Typical Investor Questions 119
VII. Conclusion 122
Chapter 6 Active Risk and Return Decomposition of Smart Beta and Active Strategies 125
I. Introduction 127
II. Risk Decomposition of Smart Beta Strategies 127
III. Risk Decomposition of Active Strategies 134
IV. Typical Investor Questions 142
V. Conclusion 148
Part IV Performance Characteristics of Smart Beta Factor Strategies
Chapter 7 Performance Characteristics of Individual Smart Beta Factors 151
I. Introduction 152
II. After-Cost Performance: Accounting for Implementation Costs 154
III. After-Cost Performance Characteristics 158
IV. Typical Investor Questions 168
V. Conclusion 171
Chapter 8 Performance Characteristics of Factor Diversification Strategies 173
I. Introduction 175
II. Active Return Correlations 175
III. Performance Characteristics of Factor Diversification Strategies 179
IV. Constructing Diversification Strategies: The Portfolio Blending versus Signal Blending Debate 197
V. Typical Investor Questions 202
VI. Conclusion 209
Chapter 9 The Low-Volatility Anomaly 211
Roger G. Clarke, Research Consultant, Analytic Investors
Harindra de Silva, Portfolio Manager, Analytic Investors/Wells Fargo Asset Management
Steven Thorley, H. Taylor Peery Professor of Finance, Marriott School of Business, Brigham, Young University
I. Introduction 211
II. Historical Manifestation of the Low-Volatility Factor 212
III. How Is “Low Volatility” Defined? 214
IV. Secondary Factors of Low-Beta Portfolios 218
V. Building a Low-Volatility Portfolio 224
VI. Publicly Available Low-Volatility ETFs 226
VII. Summary and Conclusion 226
Part V Smart Beta Implementation
Chapter 10 Structuring Better Equity Portfolios: Combining Smart Beta with Smart Alpha 231
I. Introduction 232
II. Current Portfolio Structuring Practices 233
III. Portfolio Structuring: A Suggested Framework 235
IV. Typical Investor Questions 246
V. Conclusion 258
Chapter 11 Incorporating ESG with Smart Beta 261
I. Introduction 262
II. ESG Data 263
III. Incorporating ESG Strategies 264
IV. Incorporating ESG with Smart Beta 273
V. Typical Investor Questions 277
VI. Conclusion 281
Chapter 12 An Alternative to Hedge Fund Investing: A Risk-Based Approach 283
I. Introduction 283
II. Benefits of a Diversified Portfolio of Hedge Funds 286
III. Systematic Drivers of Hedge Fund Performance 296
IV. Liquid Tracking Portfolio Simulated Performance 301
V. Developments in the Hedge Fund Industry 309
VI. Conclusion 314
Part VI Asset Owner Perspectives
Chapter 13 Implementing Smart Beta at CalPERS, a Conversation with Steve Carden 319
Investment Director, Global Equities, California Public Employees Retirement System
Chapter 14 A Pension Fund’s Journey to Factor Investing: A Case Study 331
Hans de Ruiter, Chief Investment Offi cer, Stichting Pensioenfonds TNO; Associate Professor, Vrije Universiteit Amsterdam
I. Introduction 331
II. The Case for Passive Market Cap–Weighted Strategies 332
III. Are Smart Beta Strategies the Better Alternative? 333
IV. Practical Considerations 337
V. Conclusion 341
Chapter 15 Using Smart Beta for Efficient Portfolio Management 343
Ilian Dimitrov, Head of Growth Assets, Oak Pension Asset Management Limited; Vice President, Investments, Barclays Bank UK Retirement Fund
I. Introduction 343
II. Motivation and Strategy Selection 344
III. Challenges 344
IV. Product Selection 345
V. Smart Beta Allocation 347
VI. Governance, Monitoring, and Performance Benchmarking 348
VII. Conclusion 348
Part VII Consultant Perspectives
Chapter 16 Smart Beta from an Asset Owner’s Perspective 351
James Price, Director, Willis Towers Watson
Phil Tindall, Senior Director, Willis Towers Watson
I. The Smart Beta Revolution or Evolution? 351
II. Smart Beta from the Asset Owner Perspective 356
III. Asset Owners Face New Challenges When Using Smart Beta Strategies 364
IV. Future Developments 367
V. Concluding Thoughts 371
Chapter 17 Smart Beta: The Space Between Alpha and Beta 373
Andrew Junkin, President, Wilshire Consulting
Steven Foresti, Chief Investment Offi cer, Wilshire Consulting
Michael Rush, Vice President, Wilshire Consulting
I. Factors: The Building Blocks of Portfolios 375
II. Alpha or Beta? 375
III. Equity Factor Investing: An Example 377
IV. Performance of Key Equity Factors 377
V. Implementation of Smart Beta 379
VI. Smart Beta Case Study: A Potential Complement to Traditional Active Management 383
VII. The Pros and Cons of Smart Beta 385
VIII. Conclusion 387
Part VIII Retail Perspectives
Chapter 18 Smart Beta Investing for the Masses: The Case for a Retail Offering 395
Lisa L. Huang, Head of Artifi cial Intelligence Investment Management and Planning, Fidelity Investments
Petter N. Kolm, Director of the Mathematics in Finance Master’s Program and Clinical Professor, Courant Institute of Mathematical Sciences, New York University
I. Introduction to Factor Investing and Smart Beta 396
II. Why Provide a Smart Beta Strategy in Today’s Retail Market? 399
III. Challenges in Developing a Smart Beta Portfolio Strategy for Retail Investors 401
IV. Implementing a Smart Beta Portfolio Strategy as a Fiduciary Advisor 402
V. A Look into the Future 407
VI. Conclusion 409
Chapter 19 Positioning Smart Beta with Retail Investors, a Conversation with Jerry Chafkin 411
Chief Investment Officer, AssetMark
Part IX Concluding Remarks
Chapter 20 Addressing Potential Skepticism Regarding Smart Beta 425
I. Skepticism Regarding Factor Existence 425
II. Skepticism Regarding Implementation 426
III. Skepticism Regarding Factor Persistence 429
IV. Conclusion 430
Chapter 21 Conclusion 431
About the Authors 433
Bibliography 447
Additional Disclaimers 459
Index 463
