Sticking To The Basics Of Smart Beta Investing

September 20, 2016

In a world of new products, factors and strategies, it can be easy to forget about the basics of investing, and to stick to something that works. Justin Sibears, managing director of Newfound Research, says that it’s the basics that will work over time, no matter the ups and downs in between. Ahead of his keynote speech at the Inside Smart Beta conference in New York on Sept. 22 and 23, Sibears explains why investors should not rely on backtests, to have conviction, and not to invest in any strategy that appears to be overly complicated in order to justify a higher fee.

Inside ETFs: Can you elaborate on how to differentiate between a fad and a genuine strategy?

Justin Sibears: In my mind you have to distinguish between a trend or a fad and a really sustainable way to manage money in your portfolio. It comes down to data, having the knowledge that you can prove it works over time and really understand why it works.

One of the big problems is that when it comes to evaluating a strategy, it starts and ends with performance, without people asking why. It’s really the “why” part that’ll indicate whether that backward-looking performance can be repeated going forward.

Inside ETFs: How do you define a fad?

Sibears: When picking a strategy, you need to be grounded in data. As for one fad sticking around or not, that’s up to the market, but for me, there are plenty of ways to invest, with a huge amount of data to support it.

Inside ETFs: How much of a problem is that, in terms of products with no supportive data that are being peddled to investors?

Sibears: I think it’s a big problem. In a lot of cases, the data is very simple, which presents issues for managers trying to make money. If it’s momentum, for example, then simply buy things that are up over the last 12 months. And in a world where you’re trying to justify your fee, there’s a tendency to overcomplicate things to make you seem smarter than everyone else.

There’s value in being simple. It’s hard for the average investor to stick to an approach, in the same way that it’s hard for an active manager.

Is there an easy way to evaluate performance and understand how it works?

Sibears: There’s not an easy way in the sense that there is not a definitive answer. Whether it’s value or momentum, no one knows with 100% certainty why it works. But there are theories that exist.

There are two camps of thinking with momentum—those who believe that momentum takes advantage of behavioral biases of many investors, which causes these trends to exist. The other is the risk camp, meaning that taking risk is associated with generating returns.

 

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