What is smart beta?

Smart beta investing- is a term that has been thrown around quite abit. I believe it is more than adequately explained by Junus and Sandra and I agree, its definition is by nature very loosely termed.

I've attended a talk given by Nomura attesting to their smart beta investment fund's outperformance against S&P500 benchmarks. While they explained they reevaluted beta using a slew of factors which they said was really not difficult(not exactly mentioned other than P/B), when I questioned them about their relative outperformance against other of Nomura's more traditional investment funds- they did not share any insights.

While its largely logical they need to keep their exact quantitative strategy a secret perhaps from their other competitors, I am really skeptical about its true effectiveness. Shouldn't all companies embracing smart beta investing and ditch the CAPM beta if it was that easy and fullproof? And how exactly do you expect retail investors to buy into such a vague investment portfolio when you are so secretive about it?

A.k.a. advanced beta, alternative beta or strategy indices.

In a nut shell, It is a general term for rules based investment strategies that do not use conventional market capitalisation weights (which have sometimes been criticised for overweighting overvalued stocks and underweighting undervalued ones.)

Smart beta looks to provide a better risk and return trade-off than conventional market cap weighted indices by using alternative weighting schemes based on measures such as volatility or dividends.

You will still need to do at exactly what weighting schemes they are looking to use.

Note that while it requires less decision making, it still has higher trading costs compared to traditional passive management.