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PowerShares-sponsored Cass Business School white papers put smart beta under the spotlight


ETF provider Invesco PowerShares has released a series of four papers produced by Cass Business School, looking at the origins, the source of performance and due diligence challenges of Smart Beta. 

“Smart Beta is becoming an increasingly popular component in investors’ portfolios and these products are becoming ever more mainstream,” explains Bryon Lake, Head of Invesco PowerShares – EMEA.  “We were pleased to link with Cass Business School and believe that these papers will help inform and educate investors in how they can be used effectively within portfolios.”    
The four papers examine in depth the origins, the source of performance, and the monitoring challenges that Smart Beta presents.
The first paper looks at the origins of Smart Beta.While the modern stock market index is usually traced back to the creation of the Dow Jones Industrial Average in 1896, it was the work some 60 years later of Harry Markowitz who introduced the world to the phrase ‘Modern Portfolio Theory’ in the 1950’s and the work of Eugene Fama which introduced the investment world to the notion of the Efficient Market Hypothesis (EMH) that essentially formed the intellectual basis for a style of investing that has become known invariably as ‘passive investing’ or ‘index tracking’.
With this intellectual firepower behind it, this approach to investing has grown dramatically over the past forty years, with an infinite number of ways that the constituent weights of a financial market index and the financial industry can be defined. This paper considers the history of these alternative approaches to indexing and the moniker of ‘Smart Beta’.
The second paper focuses on the empirical evidence for Smart Beta investing examining the performance of some relatively well known, commercially available Smart Beta investment strategies. Having analysed the performance of some of these investment approaches, the paper then investigates the source(s) of their performance.
The third paper extends the study to look more closely at 9 Smart Beta, US equity strategies that have been transformed into financial market indices by S&P and asks whether combinations of them could generate a more attractive risk-return profile for investors than could be achieved by investing in a market cap-weighted US equity portfolio. In essence it looks for evidence that ‘smart US equity portfolios’ can be built from Smart Beta components.
The final paper explores the challenges of investing in individual Smart Beta funds or ETFs, or indeed portfolios of these investment vehicles. It also explores the challenges involved in monitoring the performance of smart beta investments, by contrasting these with those posed by investing in traditional, active mutual funds.

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