Smart Beta Investing

I attended a luncheon and presentation on “Smart Beta” organized by CFA Society Malaysia on 22^nd June 2017.  The speaker was Mr. Charles J. Yang, CFA, Managing Director of Tokio Marine Asset Management.  It was a great event and the speaker delivered a very concise presentation about Smart Beta Investing.

Mr. Yang pointed out that smart beta is not a “modified” mathematical definition of conventional beta.  It could be interpreted as a category of asset management, somewhere between passive and active management.  The total asset under management using smart beta approach was about US$ 416 billion in 2016.  Among the common factors of smart beta strategy such as “Low Volatility”, “High Dividend”, “Book Value”, “Cash Flow” and etc., Mr. Yang presentation was focusing on “Low Volatility”.

Generally, in strong macro environment, “Value”, “Momentum” and “Size” investing strategies will perform better while in weak macro environment, “High Dividend”, “Quality”, “Minimum Volatility” investing strategies will perform well.  Data shown that smart beta strategy has been performing well for the past 6 – 7 years.  In my opinion, the macro environment after the 2008 crash was neither strong nor weak, thus the combination of “Low Volatility”, “High Dividend” and “Value” of smart beta strategy is applicable.

As an engineering to finance apprentice, I asked some technical questions during the Q&A session.  My questions were:

1. What was the time-period used to calculate beta?
2. What was the data frequency used to calculate beta?
3. Why these time-period and data frequency were chosen to calculate beta?

Below were Mr. Yang’s answers:

1. Three years.
2.  Monthly data.
3. Trial and error basis using quantitative statistical method, need to back test.

From his reply we could infer that portfolio rebalancing is required periodically as the volatility of the assets in the portfolio may change from time to time, thus a quantitative team is essential to assist the smart beta strategy.