Using a database of over 20 countries, a team of British academics tested the five most popular smart beta factors to see whether they would have proven successful over time. This according to a recent article in the Financial Times.
The factors studied and respective finds are as follows:
- Low-risk: the highest returns “come from avoiding the riskiest stocks, rather than seeking out the least risky.” When divided into quintiles going back to 1963, the article explains, the highest-risk portion returned only 4.1 percent while the other four returned at least 10.9 percent.
- Momentum: Returns were volatile but, over time, “accumulated impressively.” The article noted that, “across 23 countries, the effect proved robust, and has strengthened slightly since it was first demonstrated in 2000—very different from the experience with other factors.”
- Size: “It endured a long period of failing to outperform as hoped—although the phenomenon that smaller companies behave differently from large ones remains intact.” Since 2000, the study found, the global small company premium has been 0.45 percent per month, “disappointing compared with the findings when the small company effect was first identified some decades ago.”
- Value: “Conspicuously poor” since the financial crisis, but “continues to show up, although not universally.”
- Income: This factor has performed well since 2000, the article says, but “may be due to the strange yield-hunting conditions that have persisted for much of that time.”
While FT describes the study findings as “upbeat”, the team concluded that overly elaborate approaches to smart beta investing isn’t the best approach. “All five effects are genuine,” the article states, “in that they tend to cause stocks to perform differently (even if they do not always perform better) and all should be monitored by investors.”