14 April 2014

Smart Beta - A Different Investment Approach?

The debate about active versus passive investment strategies has been going for some years now. That rather suggests to me that there are merits in both approaches (although I lean towards an active approach in advising clients).

However, a more recent approach is "Smart Beta" (which also goes by other names). Here's the basics.

Rather than following an existing index such as the FTSE 100 - which is what a passive equity fund might do - a Smart Beta approach recognises that such as index is not necessarily a good indication of current value nor of future performance. That's because an equity index is based on the share prices of a range of companies (normally included in the index on a weighted basis), and share prices include not only the fundamental value in a company but some sentiment too, which might push the share price up or down.

Instead a Smart Beta approach might look at the fundamental value of a range of companies as shown in its accounts or by reference to its dividends, for example.

It's an interesting approach, but possibly too soon to judge its merits.

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