Smart beta failing to capitalise on source of excess returns

Like market cap-based weighting, most types of smart beta are systematic, formulaic weighting strategies determined by rules. But Adrian Banner of Intech Investment Management argues that cap weighting is inefficient and that exploiting the power of portfolio rebalancing is the best way to obtain ‘smarter’ beta

In comparison to market capitalisation-based weighting, smart beta taps into various risk premia and behavioural anomalies that cap weighting overlooks and that are responsible for improved performance. But this explanation neglects to account for the fact that - unlike cap-weighted indexes - smart beta strategies are not buy-and-hold. They require trading and rebalancing to maintain their exposures. This can have a surprising impact on long-term performance, and may also provide a cause for