Jacob also questions the “strained” terminology of passive investing, complicated by the development of smart beta funds.
“The term ‘passive’, which denotes ‘passively managed’, could cover an index that is anything but passive in its complexity and ability to take risk; similarly ‘beta’ returns could be far from representative of the broad market,” the report states.
Later, she explains: “Just as difficult as it was to choose the right manager in the quest for superior risk-adjusted returns, it is now becoming difficult to select the right systematic strategy, given the explosion of product choice.
“Even something as simple as defining a factor, say value, can be done in a number of ways—book value, earnings, cash flow, or a combination of these…. different design choices in factor building, especially on the more complex end of the spectrum, can result in different exposures and, ultimately, returns.”
Over-complexity is something the funds industry has been battling with for some time. As we all know well, the majority of fund managers do not beat their benchmarks, but is the creation of ever more opaque strategies helping or hindering the cause?
