“Smart beta is much more smart marketing than smart investing,” the legendary Dr. Burton Malkiel told a financial advisor at an invitation-only lunch and book signing in Princeton.

“I'm not a fan of smart beta,” declared the professor of economics, emeritus, and senior economist at Princeton University.  Malkiel is famous for his book A Random Walk Down Wall Street, whose 12th revision still managed to pack a room and warrant celebration. The now 1.5 million-copy best-seller, first published in 1973, endorsed the concept of index funds, two years before Malkiel's friend John C. Bogle, founder of The Vanguard Group, launched the first one.

One reader cum disciple of Malkiel, Kevin T. Carter, chairs the committee that controls The Emerging Markets Internet & Ecommerce ETF (EMQQ), which was also featured at the lunch. The two met in 1998, and a year later Malkiel joined an advisory board for Carter's online brokerage firm, eInvesting, which Carter sold a year later to eTrade. Carter later founded Big Tree Capital.

When a guest's question triggered a question on smart beta, Malkiel trampled upon it. In traditional index funds, stocks are selected and weighted according to each company's market capitalization. Smart-beta strategies weigh a portfolio's stocks on book value, cash flows and dividends, and then tweak portfolios by adding what Malkiel calls “a trick or tilt toward another factor, by weight, by value or by earnings.”

The aim of smart beta is to increase the return without raising volatility. But Malkiel, the former dean of Yale School of Management, pounced on Rob Arnott, founder and chair of Research Affiliates, acclaimed for smart beta plays and his RAFI fundamentals-based indexes, to attack the strategy.

Acknowledging first that Arnott is famous for outperforming indexes “by a little bit,” Malkiel insisted that a closer look shows that the most dramatic example of the strategy's outperformance centered on two quarters that fell in 2008. At the time, the firm's portfolio held double its normal weighting for banks, argues Malkiel, with just two companies--Citi Group and Bank of America--together constituting 15 percent of the portfolio. The two banks were also selling at very low multiples to their book value. In the third quarter, amidst talk of the banks possibly being nationalized, “you could see that he had made a bet,” declared Malkiel, who currently is CIO of Wealthfront, a Palo Alto-based investment and robo-advisory firm.

“And, that bet worked! But don't tell me that portfolio wasn't risky,” he said, raising his voice to address the rest of the table. “I don't care what his beta was … that was a risky bet. And, in general, the smart beta stuff hasn't worked. Value hasn't worked, recently, small vs. large -- sometimes has but sometimes hasn't worked. RAFI [where popular stocks are traded for the unloved] performed,” said Malkiel, “because they used momentum investing -- at a much higher cost to investors than traditional ETFs.”

“So I'm not a big fan of smart beta ETFs.” Then the professor signed another copy of his book and dug into something he enjoys almost as much as jousting with colleagues, a slice of the house specialty, quiche.