Why factor tilts are not smart beta – Rob Arnott


Here’s an article for the serious quants. But, it should also be one for all of us. There is so much jargon surrounding factor investing, smart beta and passive management, including the increasing use of ETFs, that it is hard, if not impossible for ordinary institutional investors to get a handle on the trends.

Research Affiliates, the California-based firm started by Rob Arnott, which can lay a justifiable claim to starting the smart beta craze, is a prolific producer of research and white paper views. In his latest one – which is the second in a three-part series – written with two colleagues, Arnott grapples with the major definitional issues.

I enjoy asking quant managers this question: “How many ‘factors’ do you think there are?” Their answers vary enormously from “an infinite number”, through “ a couple of hundred”, down to “about 12” or even “only six” which are the ones which most commonly end up in investment product.

This Research Affiliates article – in fact the series of three – is worthwhile reading, given the strong trends to systematic investing to cope with a relentless downward pressure on fees and an increasing awareness of implementation costs and money unnecessarily lost to taxation.

And if anyone can send me an easy-to-read summary of the conclusions, so I can carry a conversation on the topic, I would be personally very grateful.

E: greg.bright@binalong.net