<!-- Swiftype Variables -->

White Papers

The Persistence of Smart Beta

When evaluating investments linked to non-standard indices, investors should first ask if the anomaly is expected to persist, as well as if a particular vehicle is well-designed to exploit the factor. At a general level, two reasons explain why a particular strategy might outperform. 1) The outperformance might simply be compensation for increased risk. Fama and French showed that cheap stocks outperform more expensive stocks over time. Perhaps this is because cheap stocks are more volatile than expensive ones and the outperformance might simply be a reward for the incremental risk of cheapness. 2) A strategy's incremental performance might not be a compensation for risk, but a true anomaly, implying the incremental outperformance of cheap stocks more than compensates for their putative higher risk. We stress that investors should be wary of analyzing returns in isolation without any consideration for the associated risk, and that seemingly persistent returns may actually be a reward for thus far unappreciated risks.

Authors: Hamish Preston, University of Birmingham; Tim Edwards, PhD Senior Director Index Investment Strategy, S&P Dow Jones Indices; Craig J. Lazzara, CFA Managing Director Index Investment Strategy, S&P Dow Jones Indices

  view more white papers

By downloading a white paper, you are agreeing to have your contact information shared with the content sponsor, who may then contact you.

All white papers posted were created by the listed authors who are solely responsible for the research, finding and all materials contained therein. Pensions & Investments has not verified or edited the materials (other than for length and style) and does not necessarily agree or disagree with the analysis and positions expressed by the authors. Reference to any company, product or service does not imply recommendation or sponsorship by Pensions & Investments.

For more information on submitting a white paper, please contact Richard Scanlon at rscanlon@pionline.com or 212-210-0157.