The panelists agreed that timing factors would be too time consuming and difficult for most advisors and investors, thus they all advocated diversified multifactor approaches to smart beta when a factor appears to underperform.
For example, during the 2008-2009 financial crisis, the advantages of smart beta factors were neutralized, said Nimeri, and value subsequently underperformed because many investors were risk averse for an extended period of time.
“Factors tend to be counter-cyclical,” Nimeri said. “You can have long data and short data factors, and in some cases they will appear as if the risk premium has been wiped out, but when you look over a longer cycle you’ll see a persistent premium that you can access over a period of time.”
Advisors should also keep in mind that smart beta products come with caveats, said Jacobs.
“If you look at smart beta from a process perspective, these are passive products,” Jacobs said. “There’s a methodology around all of our approaches. The experience, though, is more like an active fund. You’ll see higher turnover than a traditional index. Smart beta funds tend to have 30 to 40 percent turnover, and you’ll see more tracking error.”
Thus, Jacobs said it is important for advisors to have discriminating tastes when it comes to smart beta, and not to approach new factors, measurements and products with caution.
“I would have a healthy does of skepticism with any new factor research promising returns,” Jacobs said. “Factor investing is designed to be a long-term investing strategy