Smart beta and the surgeon’s toolkit

Bob Collie, blogging live from Russell Investments Institutional Summit
Bob Collie, blogging live from Russell Investments Institutional Summit

Russell’s Institutional Summit conference is currently taking place in Dana Point, Ca. This is the second of a series of blogs highlighting snippets of the investment ideas being delivered at this event.

Not everybody loves the phrase smart beta, but the concept is getting a lot of attention. Here at Russell, we believe that, in a sense, it all started with the launch of the Russell 1000® and 2000® indexes thirty years ago.

Introducing the concept of smart beta was the task given to Erik Ristuben (Russell’s Chief Investment Strategist) earlier today. For a long time, factor exposures simply meant large/small and value/growth: a short list, although useful nonetheless. But not every investment strategy is explained by cap and style. There’s volatility, quality, momentum and many more. Indeed, today the list consists of hundreds or perhaps even thousands of potential exposures that can be measured and managed using a range of instruments from ETFs to futures and other derivatives. This is something of a quiet revolution in how portfolios are being managed.

Erik talked of “surgical precision”. In other words, these new tools allow investors to target specific factor exposures in a more precise fashion than they were ever able to in the past. And there are lots of reasons they might want to do that: because some factors can provide higher returns over a full market cycle; because factor return patterns are cyclical, creating the opportunity for dynamic positioning; because factors can oftentimes represent unintended residual risk positions that we’d prefer to eliminate in our portfolios.

Whatever the reason for wanting to manage these factor exposures, the ability to do so is a powerful thing. Like most toolkits, success depends on the skill of the user: smart beta is not a short cut to easy success in investment, but it is part of a better toolkit.


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