This was the subject of The Big Read in the Financial Times on 22nd July and it sparked my interest. However it is not a new story. Over the last decade we have been explaining to our clients how the industry has become increasingly commoditised over the last 30 years – what used to be expensive and complex is quickly becoming cheap and simple.
Smart beta is a relatively new term in investment management, but the concept has been around for decades. It is a type of factor investing, a strategy in which the securities are chosen based on attributes that are associated with higher returns, which uses different rules of portfolio construction than traditional asset class investment. The idea of smart beta is to potentially add value to a portfolio by systematically selecting alternative weightings and portfolio holdings in a way that deviates from the manner in which traditional market capitalization based indices have been created. Regular rebalancing is also part of this strategy. Rebalancing is a process in which the original weighting in the portfolio is realigned.
More and more individuals are looking to invest in a manner that is consistent with specific principles and values. It is not uncommon for individual investors to express concern about how their investment decisions affect the world they are creating for future generations. There are an increasing number of emerging investments designed to put money to work in social purpose businesses to create sustainable social change, as well as the potential for a financial return. Changes both from within the charity sector and from donors have pushed philanthropic organisations to be more commercial in their approach. At the same time, business models are developing that align business strategy to remedy environmental and social challenges.
- Sharp increases in the prices of assets
- Great public excitement about those aforementioned price increases
- An accompanying media frenzy
- Increasing frequency of stories about people earning lots of money, causing envy among those who aren’t
- “New era” theories to justify unprecedented price increases
The progressions above are consistent with most asset bubbles worldwide and should give investors pause when considering buying the next dot com joke of an asset. Technically, asset bubbles are defined as prices of assets, such as housing, stocks, gold, etc., becoming over-inflated. Prices rise quickly over a short period of time, and are not supported by underlying demand for the asset itself.
At MASECO we are always looking into ways to improve risk adjusted returns for our investors, adopting robust and academically proven strategies that are not only understandable, but also intuitive. As we see it, the issue with hedge funds is that they tend to adopt black box strategies that are hard to untangle, and their fees err to the high. That said, there are always exceptions out there, and we hope that one day there may be a new generation of cheaper hedge funds with more transparent strategies.
So we are not wholly in agreement with the blog piece below, but regardless we wanted to share it with you, as it is both thought provoking and fun to read, if a little broad based, and simplistic in terms of the fee structure.
Below is a blog on the subject, written by Dan Wheeler, who recently retired from his post as Director of Financial Adviser Services with Dimensional Fund Advisers, which he held for over 20 years. We hope you enjoy.
- In China, if you are a one-in-a-million person, there are 1,360 other people like you1;
- The top 28% of India’s population by IQ is greater than the whole population of North America1;
- By 2050 the world will have an additional 2 billion people, totalling 9 billion, looking to sustain themselves and improve the way they live with the same finite resources;
- In as little as 15 years, the demand for food, water and energy will rise by 35%, 40% and 50% respectively2.
The FTSE 100 reached an all-time high in March breaching the 7000 mark, surpassing its previous peak achieved on the eve of the millennium when, fresh from university, I started working in the City of London. This illustrates that it can take a long time for the stock market to recover from a crash like the bursting of the tech bubble. But is it really representative of an investor’s experience since 1999 – have we been treading water for sixteen years? In short, the answer is no.
A more realistic measure of the investment return of UK’s largest listed companies is the total return, which includes the reinvestment of dividends. By that measure, £100 would have fallen in value after the dot.com crash but would have recovered its original £100 value by the end of 2005 and since then grown to c£168.
Stop being distracted by the endless media noise and spend your spare gadget time on something more productive!
I recently ran out of battery on my mobile phone and was left waiting for my friend in a bar for 15 minutes. Shock, horror! I had no idea what to do with myself. Eventually my nerves settled and a great by-product of not having a distraction manifested itself, I spent some time alone with my brain. More specifically, I reflected on how dependent we are on our gadgets these days and, despite what we may think, how much time we spend procrastinating on these devices.
A couple of months back I wrote a blog piece para-phrasing Warren Buffet’s sanguine investment instructions to his wife, laid out in his Will, to go cheap and passive in his absence, which he shared with investors in this year’s Berkshire Hathoway annual report.
Unless you have been travelling the Silk Road or sailing across the Atlantic, you will no doubt have been following the referendum debate and narrowing polls in Scotland with interest. Wherever your sympathies lie, it would not be unreasonable to have some concern about what this means for an investment portfolio if you are lucky enough to have one (or more).