Long-time critic of “Smart Beta” strategies, Richard Ferri, had the following to say at a recent Morningstar conference:
Not only is “smart beta” more expensive than traditional beta investment products, but it isn’t as safe. “There is always more risk when get away from beta,” he said. “Any other beta is additional beta, not smart beta.” The third disadvantage is there are long periods of time when these strategies underperform the market, noting that small cap value products under performed for two decades.
I won’t speak to every “Smart Beta” strategy out there, but I will address that statement as it relates to momentum. As pointed out in John Lewis’ recent white paper Point and Figure Relative Strength Signals, momentum actually tends to have relatively short periods of underperformance (this white paper studied momentum over a 24 year period from 1990 to 2013).
On a rolling 3 year basis, the Buy in X’s basket outperformed the S&P; 500 Total Return Index 85% of the months, and it outperformed the equal weighted universe in 76% of the months. These numbers are right in line with what we have seen in other studies on the consistency of momentum returns.
The table below summarizes the findings of the white paper:
At least when it comes to momentum as a “Smart Beta” factor, the data makes the case that both the long-term results and the frequency of outperformance are indeed compelling.
The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.
