Friday, June 27, 2014

"Smart" beta - is it all in the words?



There was a nice thoughtful piece this week in Barron's blog on whether "smart" beta has "jumped the shark". The ideas behind smart beta, different approaches to forming a market portfolio are real. Equal weighting of an index may be useful versus a market capitalization index, but it does not have to be smart. Different is not smart. These smart beta portfolios are only smart because they outperform an existing approach. Hence, the smart beta of today may be the dumb beta of tomorrow.  

Who does not want to have smart beta? Would you like to have dumb beta?  Smart beta has no meaning for the manager not already familiar with the concept. Smart beta could be whatever the definer wants it to be. This term or language does not impart any knowledge to the reader. Hence, it is a concept that may have no meaning.

There can be good arguments on the validity of concepts like "smart beta", butan important issue is the precision in language within  finance. If "smart" beta applies to many things, then it loses its meaning.



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