Equity Smart Beta and Factor Investing for Practitioners
A guide to the popular and fast growing investment opportunities of smart beta Equity Smart Beta and Factor Investing for Practitioners offers a hands-on guide to the popular investment opportunities of smart beta, which is one of the fastest growing areas within the global equity asset class. This well-balanced book is written in accessible and understandable terms and contains an in-depth manual filled with analytical information and new ideas. The authors—noted experts in the field—include a definition of smart beta investing and detail its history. They also explore the distinguishing characteristics of smart beta strategies, offer an overview of factor investing, and reveal the implementation of smart beta approaches. Comprehensive in scope, the book contains helpful examples of applications, real-life illustrative case studies, and contributions from leading and respected practitioners that explain how they approach smart beta investing. This important book: Contains an in-depth exploration of smart beta investing Includes the information written in clear and accessible language Presents helpful case studies, illustrative examples, and contributions from leading and respected experts Offers a must have resource coauthored by the Head of Goldman Sachs’ equity smart beta business Written for investors who want to tap into the opportunities that smart beta offers, Equity Smart Beta and Factor Investing for Practitioners is the comprehensive resource for learning how to create more efficient overall equity portfolios.
Acknowledgments xiii Disclaimer xv Introduction 1 Part I Overview of Equity Smart Beta Space Chapter 1 Evolution and Composition of the Equity Smart Beta Space 11 I. Introduction 12 II. Evolution of Equity Smart Beta 13 III. Desired Characteristics of Smart Beta Strategies 19 IV. Composition and Definition of Equity Smart Beta 21 V. Typical Investor Questions 21 VI. Conclusion 30 Part II Equity Common Factors and Factor Investing Chapter 2 An Overview of Equity Common Factors and Factor Investing 35 I. Introduction: What Are Equity Common Factors? 36 II. Evolution of Equity Common Factors and Factor Investing 37 III. Typical Investor Questions 49 IV. Conclusion 53 Chapter 3 Explaining Smart Beta Factor Return Premia 55 I. Introduction 56 II. Data Mining 57 III. Risk-Based Explanations 58 IV. Behavioral Explanations 59 V. Structural Explanations 62 VI. Typical Investor Questions 63 VII. Conclusion 68 Part III Capturing Smart Beta Factors Chapter 4 Weighting Schemes 71 I. Introduction 73 II. Weighting Schemes Used to Capture Factor Returns 73 III. Assessing the Investment Performance and Efficiency of Weighting Schemes Used to Capture Factor Returns 82 IV. Typical Investor Questions 96 V. Conclusion 101 Chapter 5 Factor Specifications 109 I. Introduction 110 II. Value 111 III. Momentum 114 IV. Low Volatility 115 V. Quality 116 VI. Typical Investor Questions 119 VII. Conclusion 122 Chapter 6 Active Risk and Return Decomposition of Smart Beta and Active Strategies 125 I. Introduction 127 II. Risk Decomposition of Smart Beta Strategies 127 III. Risk Decomposition of Active Strategies 134 IV. Typical Investor Questions 142 V. Conclusion 148 Part IV Performance Characteristics of Smart Beta Factor Strategies Chapter 7 Performance Characteristics of Individual Smart Beta Factors 151 I. Introduction 152 II. After-Cost Performance: Accounting for Implementation Costs 154 III. After-Cost Performance Characteristics 158 IV. Typical Investor Questions 168 V. Conclusion 171 Chapter 8 Performance Characteristics of Factor Diversification Strategies 173 I. Introduction 175 II. Active Return Correlations 175 III. Performance Characteristics of Factor Diversification Strategies 179 IV. Constructing Diversification Strategies: The Portfolio Blending versus Signal Blending Debate 197 V. Typical Investor Questions 202 VI. Conclusion 209 Chapter 9 The Low-Volatility Anomaly 211Roger G. Clarke, Research Consultant, Analytic InvestorsHarindra de Silva, Portfolio Manager, Analytic Investors/Wells Fargo Asset ManagementSteven Thorley, H. Taylor Peery Professor of Finance, Marriott School of Business, Brigham, Young University I. Introduction 211 II. Historical Manifestation of the Low-Volatility Factor 212 III. How Is “Low Volatility” Defined? 214 IV. Secondary Factors of Low-Beta Portfolios 218 V. Building a Low-Volatility Portfolio 224 VI. Publicly Available Low-Volatility ETFs 226 VII. Summary and Conclusion 226 Part V Smart Beta Implementation Chapter 10 Structuring Better Equity Portfolios: Combining Smart Beta with Smart Alpha 231 I. Introduction 232 II. Current Portfolio Structuring Practices 233 III. Portfolio Structuring: A Suggested Framework 235 IV. Typical Investor Questions 246 V. Conclusion 258 Chapter 11 Incorporating ESG with Smart Beta 261 I. Introduction 262 II. ESG Data 263 III. Incorporating ESG Strategies 264 IV. Incorporating ESG with Smart Beta 273 V. Typical Investor Questions 277 VI. Conclusion 281 Chapter 12 An Alternative to Hedge Fund Investing: A Risk-Based Approach 283 I. Introduction 283 II. Benefits of a Diversified Portfolio of Hedge Funds 286 III. Systematic Drivers of Hedge Fund Performance 296 IV. Liquid Tracking Portfolio Simulated Performance 301 V. Developments in the Hedge Fund Industry 309 VI. Conclusion 314 Part VI Asset Owner Perspectives Chapter 13 Implementing Smart Beta at CalPERS, a Conversation with Steve Carden 319Investment Director, Global Equities, California Public Employees Retirement System Chapter 14 A Pension Fund’s Journey to Factor Investing: A Case Study 331Hans de Ruiter, Chief Investment Offi cer, Stichting Pensioenfonds TNO; Associate Professor, Vrije Universiteit Amsterdam I. Introduction 331 II. The Case for Passive Market Cap–Weighted Strategies 332 III. Are Smart Beta Strategies the Better Alternative? 333 IV. Practical Considerations 337 V. Conclusion 341 Chapter 15 Using Smart Beta for Efficient Portfolio Management 343Ilian Dimitrov, Head of Growth Assets, Oak Pension Asset Management Limited; Vice President, Investments, Barclays Bank UK Retirement Fund I. Introduction 343 II. Motivation and Strategy Selection 344 III. Challenges 344 IV. Product Selection 345 V. Smart Beta Allocation 347 VI. Governance, Monitoring, and Performance Benchmarking 348 VII. Conclusion 348 Part VII Consultant Perspectives Chapter 16 Smart Beta from an Asset Owner’s Perspective 351James Price, Director, Willis Towers WatsonPhil Tindall, Senior Director, Willis Towers Watson I. The Smart Beta Revolution or Evolution? 351 II. Smart Beta from the Asset Owner Perspective 356 III. Asset Owners Face New Challenges When Using Smart Beta Strategies 364 IV. Future Developments 367 V. Concluding Thoughts 371 Chapter 17 Smart Beta: The Space Between Alpha and Beta 373Andrew Junkin, President, Wilshire ConsultingSteven Foresti, Chief Investment Offi cer, Wilshire ConsultingMichael Rush, Vice President, Wilshire Consulting I. Factors: The Building Blocks of Portfolios 375 II. Alpha or Beta? 375 III. Equity Factor Investing: An Example 377 IV. Performance of Key Equity Factors 377 V. Implementation of Smart Beta 379 VI. Smart Beta Case Study: A Potential Complement to Traditional Active Management 383 VII. The Pros and Cons of Smart Beta 385 VIII. Conclusion 387 Part VIII Retail Perspectives Chapter 18 Smart Beta Investing for the Masses: The Case for a Retail Offering 395Lisa L. Huang, Head of Artifi cial Intelligence Investment Management and Planning, Fidelity InvestmentsPetter N. Kolm, Director of the Mathematics in Finance Master’s Program and Clinical Professor, Courant Institute of Mathematical Sciences, New York University I. Introduction to Factor Investing and Smart Beta 396 II. Why Provide a Smart Beta Strategy in Today’s Retail Market? 399 III. Challenges in Developing a Smart Beta Portfolio Strategy for Retail Investors 401 IV. Implementing a Smart Beta Portfolio Strategy as a Fiduciary Advisor 402 V. A Look into the Future 407 VI. Conclusion 409 Chapter 19 Positioning Smart Beta with Retail Investors, a Conversation with Jerry Chafkin 411Chief Investment Officer, AssetMark Part IX Concluding Remarks Chapter 20 Addressing Potential Skepticism Regarding Smart Beta 425 I. Skepticism Regarding Factor Existence 425 II. Skepticism Regarding Implementation 426 III. Skepticism Regarding Factor Persistence 429 IV. Conclusion 430 Chapter 21 Conclusion 431 About the Authors 433 Bibliography 447 Additional Disclaimers 459 Index 463
KHALID (Kal) GHAYUR, CFA, FSIP, is Managing Director, Head of ActiveBeta Equity Strategies, Goldman Sachs Asset Management. He oversees his team's customized, factor-based equity portfolios. Prior to joining GSAM, Kal was the Managing Partner and Chief Investment Officer for Westpeak Global Advisors, a pioneer in the smart beta space. RONAN G. HEANEY is Vice President, Head of ActiveBeta Equity Research, Goldman Sachs Asset Management. He leads investment research activities, including improving quantitative investment models and portfolio construction methodologies and identifying and testing new model components and implementation techniques. STEPHEN C. PLATT, CFA, is Vice President, Head of ActiveBeta Equity Portfolio Management, Goldman Sachs Asset Management. He is responsible for portfolio management, including portfolio construction and risk management of global developed and emerging market equity portfolios and custom indexes.
Combining the benefits of passive investing with the advantages of active investing strategies, equity smart beta and factor investing is an increasingly discussed and debated topic within the investments industry. When properly implemented, smart beta reduces risk or increases diversification at a cost lower than traditional active management and marginally higher than straight index investing, resulting in an optimally diversified portfolio. A recent survey of asset owners, representing over $3.5 trillion in assets worldwide, found that 77% of respondents have already evaluated or implemented smart beta strategies, or are planning to do so. Accordingly, smart beta adoption rates increased from 26% in 2015 to 48% in 2018. The wide range and growing variety of smart beta products available in the marketplace can prove to be overwhelming for investors often struggling with how to analyze and select such products. Factor specifications, weighting schemes, and methodologies used to control turnover, diversification, or capacity are just some of the factors that influence variances in smart beta offerings. Equity Smart Beta and Factor Investing for Practitioners satisfies the need for straightforward, accurate investor education on this important innovation in the field of investments. Written from the practitioner's perspective, this book helps readers understand the theoretical underpinnings of smart beta investing, analyze and select smart beta strategies, structure more efficient portfolios, and gain insights from other practitioners who have successfully implemented smart beta investing in their portfolios. This comprehensive book on smart beta investing: Reviews the evolution, definition, and composition of the equity smart beta space and identifies desirable characteristics of smart beta offerings Discusses the origins and theory of factor investing and risk-based, behavioral, and structural explanations of why factor premia exist Offers a framework for understanding and analyzing various weighting schemes used to capture smart beta factor returns Explains performance characteristics of smart beta factor strategies Provides examples of factor investing beyond equities, smart beta implementation, portfolio structuring, and multistrategy, multimanager portfolios Equity Smart Beta and Factor Investing for Practitioners will prove to be a valuable, hands-on manual for both investors and managers seeking to set appropriate expectations and maintain discipline during difficult times, improve the ability to achieve long-term objectives, structure more efficient overall equity portfolios, and achieve better investment outcomes.
The comprehensive guide to the rapidly growing investment opportunities of smart beta investing Smart beta investing is the fastest growing area within the equity asset class. Changing the way investors structure their overall equity portfolios, smart beta strategies emphasize the use of alternative weighting schemes to traditional market capitalization-based indexes. This important innovation is highly popular within the investments industry and has prompted the launch of numerous smart beta products. Equity Smart Beta and Factor Investing for Practitioners is the first full-length book focused on this exciting array of offerings. This practical, hands-on guide shares the practitioner's perspective on smart beta investing, combining straightforward readability with in-depth content and cutting-edge ideas. Drawing from their experiences leading the Goldman Sachs ActiveBeta team, the authors share real-life case studies, explain factor investing, define and detail the history of smart beta, and examine smart beta characteristics, strategies, and implementation methods. Equity Smart Beta and Factor Investing for Practitioners also features contributions from leading industry experts, including a variety of asset owners, asset managers, and consultants. Covering everything from explaining return premia to structuring better equity portfolios, this book will prove to be a valuable resource for anyone engaged in smart beta and factor investing.
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