passion for total  return

Is smart  beta really that smart,  inexpensive and good for   investors?

Dr.  Andreas  Sauer,  CFAMunich,  September  2015

The  source  of  beta  and   is  there  really  „dumb"  beta?

• origins  of  „beta“  in  the  CAPM

• „beta“  in  its  original  meaning  measures  sensitivity  of  an  asset  or  portfolio  to  the  market  

portfolio  

• market  portfolio:

• aggregate  portfolio  of  all  assets =  aggregate  portfolio  of  all  investors

• must  hold  each  asset  in  proportion  to  its  market  capitalization

• earns  systematic  risk  premium

• the  average  investor  is  not  “dumb”

• issues  with  market  cap  weighted  portfolios  as  benchmark  are  well  known:

• empirically  inefficent

• allocation  of  capital  along  “size”  of  a  company

• size  measured  by  “price  x  number  of  stocks”

(c)  ansa  capital  management  2015 2

The  origins  and  evolvement  of  smart  beta

• compared  to  the  market  portfolio  all  "smart  beta"  strategies  differ  in  two  dimensions:  stock  selection  and  

stock  weighting

• supposed   to  be  “smart”  because  they  are  build  on  for  decades  well  known  anomalies

• low-­‐vol anomaly:  Haugen  (1972)

• firm  size  effect:  Banz (1981)

• value  effect:  Basu (1977)

• momentum: Jegadeesh/Titman  (1993)

• and  of  course  Fama/French  (1992)

• triumph  of  quants:    active  quant  equity  has  always been  smart  beta  investing

(c)  ansa  capital  management  2015 3

Why  so  much  excitement  now?

• anomalies  are  know  for  decades

• low  volatility  equity  strategies  attractive  after  the  financial  crisis

• disappointment  with  traditional  managers

• advances  in  computer  and  data  technology:  everyone  can  become  a  quant

• measuring  “factor  exposure”  for  performance  evaluation  has  become  industry  standard  (what  is  

true  alpha?)

• perfect  naming  

• “promise”  of  cheap,  easy  and  transparent  access  to  quant  strategies  and  factor  exposure

(c)  ansa  capital  management  2015 4

US  equity factors:  rolling 5-­‐year  t-­‐stats

(c)  ansa  capital  management  2015 5

source of raw data:  www.aqr.com/library/data-­‐sets

!4

!2

0

2

4

6

8

1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Rolling25!year2t!stats

BAB SMB HML UMD

US  equity factors:  rolling 5-­‐year  t-­‐stats

(c)  ansa  capital  management  2015 6

source of raw data:  www.aqr.com/library/data-­‐sets

!4

!2

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013 2014

Rolling15!year1t!stats

BAB SMB HML UMD

Smart  beta  as  a  blend  of  active  and  passive?

• genuine  smart  beta  is  a  highly  active  and  sophisticated  portfolio  strategy

• how  is  Value/Growth/Quality  measured?• risk  model  in  low  volatility  strategies• rebalancing  interval

• smart  beta  ETFs  are  not a  "blend"  of  active  and  passive

• passive:• easy  to  replicate• transparent  for  everyone• no  discretion,  clear  rules

• as  an  index  (and  ETF)  smart  beta  strategies  need  to  be  heavily  “constrained”

(c)  ansa  capital  management  2015 7

Smart  beta not  cheap anymore

(c)  ansa  capital  management  2015 8

STOXX®  Global  1800  Minimum  Variance  Unconstrained  

STOXX®  Global  1800   STOXX®  Global  Total  Market  

Gross  dividend   yield2) 2.8% 2.3% 2.2%

Price/earnings  (trailing)3) 19.06 19.56 19.38

Price/earnings  (projected)3) 18.64 16.02 16.03

Price/book 2.22 0.46 0.55

Price/sales 1.33 1.32 1.32

Price/cash  flow 2.03 1.16 1.16

Beta  (3y)  vs  STOXX  Global  1800 0.54

5y  volatility 8.5% 13.7% 13.2%

3y  Sharpe  ratio2) 0.19 -­‐0.25 -­‐0.48

Maximum  drawdown3) 8.3% 21.8% 22.9%

source:  STOXX

Smart  beta performance

(c)  ansa  capital  management  2015 9

!50%

0%

50%

100%

150%

200%

250%

Juni+03 Juni+04 Juni+05 Juni+06 Juni+07 Juni+08 Juni+09 Juni+10 Juni+11 Juni+12 Juni+13 Juni+14 Juni+15

cum.+ outperformance+ vs.+Global+ 1800+NR+EURO

Global+1800+MinVar+unconstrained+NR+EURO Global+Strong+Quality+50+NR+EURO

Global+3000+Small++NR+EURO STOXX®+Global+Select+Dividend+100+NR+EUROsource:  STOXX

Summary

• moving  away  from  market  cap  weighting  makes  a  lot  of  sense

• it  will  still be  more  important  to  decide  when  to  invest  in  what  beta  than  the  decision  between  smart  and  dumb  beta

• “factor  investing”  :  be  aware  of  the  difference  between  risk  premia and  systematic risk  premia

• NEVER  buy  smart  beta  because  of  historical  outperformance

• beating  the  market  is  not  easy  (it  looks  easier  on  paper  …)

• the  average  investor  is  not  “dumb”

(c)  ansa  capital  management  2015 10

Conclusion

that smart

inexpensive

and good

(c)  ansa  capital  management  2015 11

✔

❌

✔

Is smart  beta really

for  investors

Contact

12

Dr.  Andreas  Sauer,  CFAansa capital  management  GmbHHochstraße  264625  BensheimGermany

T  +49  6251  85693-­‐0info@ansa.dewww.ansa.de

(c)  ansa  capital  management  2015