The art & science of Smart Beta
The rise of data and technology is transforming the investment industry, just as it is transforming our everyday lives. Look no farther than your own pocket for proof: 30 years ago, the 7.5 kg Apple Macintosh revolutionized the home computer industry with its mouse capability, a paint feature and the ability to connect to a printer.
Today, the computer that you carry in your pocket can give you the shortest route to a destination by crowdsourcing traffic data in real time, control your TV and give you a satellite image of anywhere on the planet, all while firing off as many e-mails as your fingers can type. The investment industry has experienced a similar transformation: 30 years ago, it took a sea of analysts and a room full of super computers to gather and analyze basic fundamental data like dividend yield or price-to-book. That information is now freely available from the very same 5-inch computer that woke you up this morning.
Our lives are changing, and so is the way we can build portfolios. The availability of computing power and the sheer breadth of data now available has shifted the balance of power in the investment world. Insights on valuation and sentiment were once only available to investment insiders, providing a meaningful informational advantage that could be exploited as alpha. But technology and regulatory reforms have levelled the playing field and shifted the balance of power.
Today we can build portfolios in ways that simply were not possible in the past: the widespread availability of reliable data and the insights on how to apply it have redefined the notion of passive investing. We can now deliver a wider range of outcomes – not just cap-weighted index portfolios, but index-like portfolios that capture proven drivers of returns that have historically out-performed cap weighted indices – otherwise known as Smart Beta.
Performance magazine issue 19, January 2016
Performance is a triannual digest, dedicated to investment management professionals, which brings you the latest articles, news and market developments from Deloitte’s professionals and clients.