Smart Beta Index Based On The Baml Global Corporate
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For example, in a recent paper, Research Affiliates6 looked at a smart beta index based on the BAML Global Corporate investment Grade Index, with constituents filtered using financial ratio screens and reweighted based on average cash flow and long-term assets. The smart beta index outperformed a market value weighted index by 39 basis points with volatility more than 50 basis points lower (for a Sharpe ratio 12 points higher and a comparable yield).
However, the smart beta index also had appreciably higher turnover, of 42% annualized, compared to just 28% for the market-weighted index. As such, on a stand-alone basis smart beta benchmarks are far from ideal for use in Buy and Maintain portfolios. Frequent rebalancing is a tactic that Buy…show more content… As such, alpha is a measure of security selection skill and the so-called active return on investment, and so is difficult and expensive to obtain. In contrast, beta is easy to gain exposure to through index funds (such as exchange-traded funds), which give investors cheap access to market returns.
But as we’ve already seen, replicating benchmarks based on market capitalisation weightings carries several disadvantages for Buy and Maintain investors. Smart beta benchmarks were developed to address the shortcomings of traditional market weighted benchmarks.
Smart beta works by weighting securities by factors such as earnings, dividends or risk, rather than by market capitalisation. This approach allows investors to exploit anomalies in security valuations, while still offering low-cost index-like fund management.
However, by creating one-size-fits-all asset allocations, smart beta may not provide the smarter alternative to public benchmarks that its advocates suggest, especially for insurance companies as smart beta benchmarks are not customised for their unique liability profiles and objectives.
Furthermore, smart beta indices (as with market weighted indices) do not take into account insurers’ liabilities or their unique objectives,