Clifford Asness and John Liew extol the virtues of combining Smart Beta strategies in this Institutional Investor special report:
Among the various investment styles, let’s consider the efficacy of three that are well known (and admittedly chosen as near and ear to our hearts): Value, Momentum and Profitability. Based on our analysis and a large body of academic and practitioner literature, each has produced long-run, hypothetical excess returns with low correlation to traditional markets over multiple decades, in multiple geographies and asset classes, and each is well-supported by economic theory and research. We believe that each of these, at the proper fee, would be an attractive proposition in a single factor, simple Smart Beta format and should add value to most traditional portfolios.
Furthermore these styles’ excess returns tend to be lowly correlated with one another, with performance often coming at different times. This can be really important. Consider Exhibit 2, which separately shows the worst three-year hypothetical excess returns for each style along with the hypothetical performance fore the other two styles during that same period. In each case, the worst performance for any one style is mitigated by the other two. Diversifying across various Smart Betas can and has provided a more consistent way of beating a traditional benchmark.
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That graphic says it all. Diversification is as old as the hills. However, for the last several decades the emphasis in this industry has been on diversifying by style box. I believe there are benefits to looking beyond the old paradigm and embracing the idea of diversification by strategy or, more specifically, by Smart Beta strategy.
At Dorsey Wright, Momentum is our area of expertise and we now have a broad suite of ETFs, SMAs, UITs, and Mutual Funds to give investors easy access to this factor.
A Momentum strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.
