Editor’s Letter: Issue 1, 2017
Putting Anthony Scaramucci on the cover of our latest hardcopy issue has my hysterical friends bemoaning the Orwellian language employed by White House surrogates, alternative facts being a favorite.
How they just now hit upon the idea that presidents and their administrations might use creative language to soften the blow of a hyper-partisan hammer is beyond me, and a subject for another day (or night, usually involving booze, smokes and “Fox News” as a derogatory epithet).
Any introductory college communications course reveals the reason—control the language and you control, or at least frame, the argument. It’s critical to success, whether with political debate or product distribution.
Hence smart beta, a terrific term straight from a futuristic, dystopian bestseller which needed no assist from Dear Leader, as if a mathematical measure of a security’s volatility somehow possesses anthropomorphic intelligence. The inference of course being that it’s a smart strategy and you’ll be smart by extension for using it.
But is it?
Investors are flooding smart beta ETF products, which look for undervalued gems hiding in plain sight, rather than relying on more traditional, factor-based weightings like market-cap. A proliferation of smart beta funds have recently launched, and are now seeping (crashing?) into the 401(k) space. Investing behemoth Blackrock launched a smart beta target date series in December, and the so-called Trump rally is fueling demand overall, which naturally has industry watchers worried.
“People are making classic mistakes with a shiny new set of toys,” Ben Johnson, head of ETF research for Morningstar, recently told The Wall Street Journal.
“One of the most outspoken critics of the explosive growth of smart beta is Rob Arnott, the founder and chairman of Research Affiliates and widely considered the godfather of the smart-beta movement,” the Journal added. “In a paper published last year, he said the surge into smart beta may inflate company stock prices,” before warning of the likelihood of a smart beta crash as a result.
Don’t get us wrong—we’re not here to criticize the strategy or its use; rather to temper excitement (including our own) that could lead to bad outcomes.
And part of this may be personal. While not technically a smart beta strategy, we nonetheless noticed the lag a few years back between surging gas prices and underlying energy company stocks, fancying a solid value opportunity. We got crushed.
It reinforced how ungodly unsophisticated we are in market movements and the multitude of influencing variables therein, and has us questioning the appropriateness of strategies like smart beta for the average 401(k) plan participant.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
