Regional Chief Investment Officer
Investment Strategy Specialist

Regional Chief Investment Officer Kei Sasaki and Investment Strategy Specialist Scott Barrington discuss how the rapid growth of the "smart beta" investment discipline is leading more of the investment community to evaluate its merits and potential risks.

Audio: Quantitative Investing and the Rise of "Smart Beta"

Transcript: Quantitative Investing and the Rise of "Smart Beta"

Interviewer: Scott Barrington, Investment Strategy Specialist, Wells Fargo Private Bank
Interviewee: Kei Sasaki, CFA, Regional Chief Investment Officer - Northeast, Wells Fargo Private Bank

[Scott]: Contrary to popular belief, quantitative investing has quite a long history. Just recently this investment discipline has begun to enter the mainstream and, in many cases, many such strategies have taken the branding of "smart beta". But what exactly is smart beta and what value does it provide to investors? 

Hello, my name is Scott Barrington, an Investment Strategy Specialist at Wells Fargo Private Bank. Joining me to discuss quantitative investing and smart beta is Kei Sasaki, Regional Chief Investment Officer for Wells Fargo Private Bank.

Kei, let's start by exploring the background of quantitative investing and how we arrived at "smart beta". Our research reveals that quantitative investing has been around for a long time. Would you provide a brief history of its origins and how it has evolved into "smart beta"?

[Kei]: Well Scott, its modern day origins can be traced to the likes of Benjamin Graham and David Dodd, who identified "value" as a factor to help assess return potential. As this discipline evolved, additional performance enhancing and risk-mitigating factors were identified, like yield and size. While historically many quant asset managers constructed portfolios that closely tracked market indices such as the S&P 500, many have begun to incorporate into their models factors, such as value or momentum, that appear to have a strong likelihood to enhance returns based on historical and backtested data. This growing group of quant strategies are being dubbed "smart beta".

[Scott]: So, Kei, such a scientific approach might come with many technical complexities, many of which might be beyond the comprehension of a novice investor. Yet you mention smart beta has hit the mainstream. So how was it successful in being embraced by that mainstream and is this sustainable?

[Kei]: In recent years, many investors have wrestled with episodic market volatility, rising fund fees, and lackluster active manager performance. Such issues helped give rise to the "passive" movement, which involved investors embracing an investment portfolio that mimics a market cap-weighted index. Since smart beta strategies are closely aligned to their respective benchmarks, typically "enhanced" or non-cap weighted indices, one might associate the rise of smart beta with the rise of passive investing. In fact, According to Morningstar data, since the end of 2009, smart beta assets have grown over 506 percent, compared to the overall exchanged traded funds (ETF) universe growth of 220 percent.

[Scott]: That is some pretty impressive growth. So, Kei, if I'm an investor considering smart beta, what investment options are open to me?

[Kei]: Generally, smart beta investors are either simply seeking to consistently beat a market index. Or sometimes they might be seeking a specific factor or risk exposure within a diversified investment portfolio. For instance, if they are looking for income a suitable strategy might be one that would overweight its exposure to yield factors. Various ETFs offer an accessible means to gain smart beta exposure and may provide a means for an investor to achieve a specific investments objective. However, because these strategies can be complex, we suggest that investors seek professional advice, and make sure that they fully understand how an asset manager selects assets and constructs portfolios.

[Scott]: Really great insights, Kei. Thank you for joining me in this discussion. As with any investment strategy, it is critical for investors to understand what they are buying and most importantly, how such strategy might help them achieve their goals and objectives. For more information, speak with your investment professional to determine whether the types of investments that we've discussed are appropriate for your specific circumstances. Thank you for joining us on this podcast.