“Whether you call it smart beta, factor investing or pactive, it is all referring to the same thing,” Brightman says. “It is using the technology of indexation to deliver the well-understood sources of excess return, a way to beat a simple index.”
Bernstein, however, says pactive is not smart beta. “Pactive is the decision regarding which beta to own and when,” he said in an interview with Financial Advisor. “We’ve found that the choice of beta is considerably more important than whether beta is smart or dumb.”
Still others say pactive investing is an example of something very old becoming new again. It is merely another kind of investment blending approach, says one market observer.
Ben Johnson, an analyst with Morningstar, contends that the mixing of various investment styles is not new. He adds it is too soon to decide if Bernstein’s pactive idea works.
“In theory it sounds good. But in practice, this is still active management,” Johnson says.
Bernstein’s numbers are good. For instance, his Global Risk-Balanced Moderate ETF Strategy has returned 8.81% a year over the past five years through December 31, 2017, which is about 2% better than its style index. However, Bernstein’s firm only began in 2009. Will pactive investing work in the next market crack-up?
According to Bernstein, it has already withstood some market woes, and he contends the style is essential for many investors and advisors. That’s because typical individual investors, he warns, consistently underperform. They are buying the wrong funds, often oblivious to risk levels.
That means they are taking on too much risk or perhaps the reverse, Bernstein adds. “The numbers show that over the past 20 years, the typical investor has performed in line with cash,” he said at a recent event.
He said that the average individual investor was scarred by the 2008 market disasters and has been on the sidelines since then, missing the huge stock market runup, and has only recently considered re-entering the market. So how will Bernstein do better for the average investor who often seems to jump into the market just as it is tanking and takes shelter in cash when the market is poised to roar?
Bernstein argues that his pactive approach minimizes risk through stringent beta measurement. He makes selections based on the dangers and opportunities, but he emphasizes the former. Without proper beta measurement, he cautions, alpha won’t matter.