Momentum, while a significant factor according to Arnott, is difficult to use as a predictor of outperformance because of the level of turnover in momentum portfolios

“I’m skeptical of some of these strategies, too,” Davidow says. “Not all of these new strategies are going to deliver the same experience. On the other hand, competition is a good thing if the end result is more options for consumers.”

Yet Arnott’s recent whitepaper, prognosticating a possible ‘crash’ in smart beta as investors piling into factors or strategies expecting outperformance end up underperforming the markets, provoked an outcry from some smart-beta practitioners,

“We published our education over time in a long-term educational format,” Davidow says. “He published a paper and he had a splashy headline. It definitely got attention, but it might have also distracted from the paper’s point.”

Hedge-fund boss Cliff Asness, co-founder of AQR Captial Management, was moved to publish a paper of his own in response to Arnott, arguing that it’s better to diversify across factors that work over the long-term.

Asness said that moving in and out of factors according to valuation amounts to an attempt to time the market.

“Cliff said that the siren of timing is dangerous,” Arnott said. “Chasing whatever factor is cheap is dangerous, too. On the opposite shoals, chasing factors with the best recent performance is even more dangerous than Cliff’s sirens. Cliff says that multiple small factor bets are okay, and I’m advocating big factor bets. Factors with strong past performance shouldn’t be dismissed merely because they’ve risen in relative valuation, but I would be more willing to shun factors that have become very expensive and seem to have performed well by dint of becoming expensive.”

That means that practitioners and academics will have to provide more robust information to advisors and investors on how their strategies function and perform, says Davidow.

“I think it’s incumbent on all of us who are researching smart beta that we do a better job in educating consumers,” Davidow says. “I’m encouraged because it seems like the discussions have evolved from do these strategies work to how or why do they work and how do we distinguish between them.”

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