The Vanguard Group Inc., whose officials for years have voiced skepticism about the fast rise of exotic index investing strategies, hired a top researcher away from one of the best-known promoters of smart beta, Research Affiliates LLC.
Vanguard, the largest mutual fund firm and the second-largest ETF manager, is bringing Research Affiliates analyst Denis B. Chaves to its quantitative equity group, according to John Ameriks, the leader of that group.
Mr. Chaves, who holds a doctorate in finance from the University of Chicago's Booth School of Business, has contributed to the design of Research Affiliates' famous RAFI Fundamental index. The award-winning researcher also has been a regular co-author of academic papers with Robert D. Arnott and Jason Hsu, co-founders of Research Affiliates and among the intellectual forefathers of what's now commonly called smart beta.
Vanguard, by contrast, has actively resisted the trend to make non-cap-weighted indexes out of such strategies. Unlike peers including BlackRock Inc.'s iShares, the firm has not built or licensed new indexes to capitalize on interest in smart beta. And its executives have engaged in pointed public debates with Mr. Arnott, arguing smart beta funds should be considered “active management” because they take potentially losing bets against the market.
“The term 'enhanced indexing,' which has morphed into 'smart beta,' is like fingernails on a blackboard to me,” former Vanguard Chief Investment Officer Gus Sauter wrote last year. “What makes an enhanced index fund 'enhanced?' The real answer is, probably a lot of marketing.”
A spokesman for Research Affiliates, Tucker Hewes, did not respond to a request for comment.
Vanguard's Mr. Ameriks said the firm's thinking hasn't changed. He said Vanguard has no plans to launch smart-beta exchange-traded funds. He said he's expanding his unit, which is responsible for $24 billion in assets and has existed since 1991, due to the growth of Vanguard's actively managed strategies. In 2013 for instance, the firm brought out its Global Minimum Volatility Fund, which now manages more than $1 billion.
Some of those funds bear a likeness to approaches marketed as smart beta or factor investing.
“If you're going to tilt the portfolio toward securities that you think have better fundamental value in the market, that's an active strategy. There's nothing to apologize for," said Mr. Ameriks. "It's active, and we think there are some advantages to running a strategy like that as a full-blown active proposition.
Mr. Ameriks declined to comment on Mr. Chaves' specific job functions.
