David Mazza is a senior vice president at OppenheimerFunds and leads the firm’s Beta Solutions Investment Marketing and ETF Specialist team. We recently spoke with Mazza, who will be a presenter at the 2nd Annual Smart Beta Strategies Summit on Oct. 26 in Boston hosted by Financial Advisor, Private Wealth and ETF Advisor magazines. He shared with us his thoughts regarding smart beta strategies being in the early innings of acceptance.
FA Staff: In your opinion, how many smart beta factors are there?
Mazza: While research has documented 100s of factors, we believe that six key factors exist in the equity market: size, value, quality, momentum, low volatility and yield. While there may be some debate on the behavioral or economic rationales for each, the reasons why each might be expected to achieve their intended outcomes is generally intuitive. Importantly, while performance is regime dependent, each of these factors has exhibited positive risk-adjusted returns relative to market capitalization weighted indices over the long run even after accounting for implementation costs. They have exhibited these results in numerous individual equity markets and are not dependent on overfitting based on how they can be defined to achieve these long-term results.
FA Staff: Since 2013, smart beta assets have grown from $200 billion to more than $600 billion. Are we in a bubble? Where do we go from here? Is it more of a marketing gimmick than anything else?
Mazza: Even as assets have grown considerably, smart beta is far from bubble territory and has the potential to grow even larger as the capacity for these strategies is large. Since smart beta sits at the intersection of active and passive investing, it offers investors the best of both worlds to help meet their objectives. Smart beta is built on time-tested principles that have existed and been implemented for decades by active managers, but it does so in a rules-based manner allowing for cost-effective implementation.
While smart beta may not see its 28% compounded annual growth rate continue indefinitely, we believe that we are in the early innings of acceptance as more investors look for smart beta strategies to help them potentially improve returns, reduce risk and increase diversification in an increasingly complex investment environment.
FA Staff: Can factor cyclicality be used to generate alpha?
David Mazza: Factor cyclicality can be harnessed to generate excess returns as factor returns are regime dependent. These regimes are a significant driver of their long term returns. For example, the size and value factors tend to perform best in times of economic recovery as investors are rewarded for owning riskier companies. Conversely, low volatility and quality do best in times of a slowdown as investors favor companies with lower risk.
FA Staff: How do you link factor-based strategies to outcomes?
Mazza: By their nature, factor-based strategies are outcome oriented whether they are alternatively weighted, single factor or multi-factor. With factor-based strategies, investors gain greater control over their objectives as they do not need to rely solely on blunt tools like the simple binary definition of growth or value to construct portfolios. Simply put, an investor can choose their outcome with precision by using single factor strategies. They can also be more precise about the specific exposure they may want across their portfolios with the increasing number of multi-factor options available.