Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

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rjbraun
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Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by rjbraun » Fri Sep 29, 2017 4:42 pm

This article appeared this morning, but I don't think I've seen a reference yet on Bogleheads (apologies, if it's old news)

https://www.bloomberg.com/news/articles ... -beta-push

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nedsaid
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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by nedsaid » Fri Sep 29, 2017 6:34 pm

I don't understand how billions of dollars pouring into Vanguard every year is a crisis, except for Vanguard's competitors. Vanguard is much more than just index funds, they have some really good low-cost active funds, a long-short fund, and a few factor funds. They also have a brokerage and sell annuities.
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nisiprius
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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by nisiprius » Fri Sep 29, 2017 8:37 pm

First, it doesn't seem any worse than the "identity crisis" between Vanguard's actively-managed and index funds.

Second, it's not clear to me why I should care particularly about Vanguard's growth. If anything, Vanguard may already be bigger than I want it to be.

Third, Dimensional Fund Advisors seems to me to be the "factor based" mutual fund company par excellence and they were founded in 1981 or thereabouts. They didn't have a "five-year head start" over Vanguard, they've had a thirty-six-year head start.

Well, if you want to consider Vanguard's full set of nine "style box" index funds, VISVX etc., which were completed as a set in 1998, then a seventeen-year head start. At the moment, I see that the Vanguard Small-Cap Value Index Fund has accumulated $26 billion in assets, while the DFA Small-Cap Value Portfolio has acquired $15 billion, so in this particular case Vanguard was able to catch up.
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Taylor Larimore
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"Smart Beta is dumb beta"

Post by Taylor Larimore » Fri Sep 29, 2017 9:14 pm

Bogleheads:

The famous investor Jeremy Grantham once quipped “Smart Beta is dumb beta plus smart marketing.” (Source: Google)

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Ron Scott
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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by Ron Scott » Fri Sep 29, 2017 10:51 pm

It is only natural for companies to define themselves by their most popular products. I'm not feeling the perspective that this provokes identify crises however. Sounds like "fake news" to me.

At the same time I heartily applaud new approaches to developing investment vehicles that offer good returns. Competition is good.

I'm flagship select at VG and have most of my assets there but I never call them and they don't check in on me. I'm only in it for their traditional low cost, tax efficient funds. If a better mouse trap comes along I'm all ears...

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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by munemaker » Fri Sep 29, 2017 11:16 pm

rjbraun wrote:
Fri Sep 29, 2017 4:42 pm
This article appeared this morning, but I don't think I've seen a reference yet on Bogleheads (apologies, if it's old news)

https://www.bloomberg.com/news/articles ... -beta-push
Seems like everyone is doing everything they can to slow down the $$ inflows into Vanguard.

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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by garlandwhizzer » Sat Sep 30, 2017 4:55 pm

I find it interesting that total dollar investment in smart beta efts has increased 500% in the last 10 years, 300% in the last 5 years alone. This does not include smart beta and factor-based mutual funds which also have poured a lot money into these strategies.

Cap-weighted beta index funds invest only in beta and therefore have essentially unlimited dollar capacity. Every new dollar invested simply creates another dollar of beta. Strategies that seek to outperform beta like active management, smart beta, or other factor-based approaches aim to exploit particular market segments which historically have outperformed. We don't know exactly what capacity restraints exist in those potential areas of outperformance, but it is very likely that capacity restraints exist at some point.

Larry estimates that factor returns may have decreased about 30% due to post-publication popularity but he also expects that figure to remain stable going forward. The exponential growth of dollars moving into these strategies continues, however. Time will tell how much, if any, further dilution to factor returns occurs. My own belief, which could be wrong, is that in the heavily scrutinized US LC space such strategies on average will not produce any outperformance after costs and may in fact underperform lower cost cap-weighted indexes.

Good logical arguments exist for smart beta, factor investing, as well as cap-weighted index investing. Clearly the current debate in Vanguard demonstrates this. I believe either strategy will work in the future if adhered to through the inevitable market ups and downs. I don't think Vanguard should be dogmatic and take one side only, but instead should offer both approaches. In the end both approaches can help investors achieve their goals, and it is uncertain which one will achieve better risk adjusted returns over a given time frame in the future.

Garland Whizzer

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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by Dead Man Walking » Sat Sep 30, 2017 5:14 pm

Vanguard is categorizing smart beta and factor-based funds as active funds. I agree with their categorization. Although these funds don't actively trade securities, their investments are based on quantitative algorithms. Someone had to write the algorithm that the computer uses to determine which securities have the factors desired. The funds may be passive in the sense that they are infrequently tweaked; however, their investments are actively determined and managed.

Vanguard has decided to develop smart beta and factor-based ETFs as active funds. Since investors interested in these funds prefer ETFs, Vanguard has made a smart marketing decision. Vanguard's push to convert all accounts to brokerage accounts may be to accommodate these funds. Another smart marketing decision.

DMW

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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by asset_chaos » Sat Sep 30, 2017 5:18 pm

Identity crisis seems an odd way to put it. Vanguard's quantitative equity group, which has been around for more than a little while, runs factor funds but, it appears, only in the UK so far. And Vanguard is not wishy-washy in their descriptive language about these factor funds: they are active funds, but "rules-based" quantitative active. From Vanguard UK the first line describing each factor fund is
The Fund pursues an actively-managed investment strategy.
And later
The Investment Manager’s quantitative model implements a rules-based active approach that aims to assess the factor exposures of securities, favouring equity securities which, when compared to other securities in the investment universe, have [more of a particular factor exposure].
Correction, Vanguard Australia lists two of the four factor funds available in the UK.
Regards, | | Guy

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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by triceratop » Sat Sep 30, 2017 5:21 pm

garlandwhizzer wrote:
Sat Sep 30, 2017 4:55 pm
I find it interesting that total dollar investment in smart beta efts has increased 500% in the last 10 years, 300% in the last 5 years alone. This does not include smart beta and factor-based mutual funds which also have poured a lot money into these strategies.

Cap-weighted beta index funds invest only in beta and therefore have essentially unlimited dollar capacity. Every new dollar invested simply creates another dollar of beta. Strategies that seek to outperform beta like active management, smart beta, or other factor-based approaches aim to exploit particular market segments which historically have outperformed. We don't know exactly what capacity restraints exist in those potential areas of outperformance, but it is very likely that capacity restraints exist at some point.

Larry estimates that factor returns may have decreased about 30% due to post-publication popularity but he also expects that figure to remain stable going forward. The exponential growth of dollars moving into these strategies continues, however. Time will tell how much, if any, further dilution to factor returns occurs. My own belief, which could be wrong, is that in the heavily scrutinized US LC space such strategies on average will not produce any outperformance after costs and may in fact underperform lower cost cap-weighted indexes.

Good logical arguments exist for smart beta, factor investing, as well as cap-weighted index investing. Clearly the current debate in Vanguard demonstrates this. I believe either strategy will work in the future if adhered to through the inevitable market ups and downs. I don't think Vanguard should be dogmatic and take one side only, but instead should offer both approaches. In the end both approaches can help investors achieve their goals, and it is uncertain which one will achieve better risk adjusted returns over a given time frame in the future.

Garland Whizzer
Worth noting that while the exponential growth in smart beta assets includes e.g. growth, large cap growth while these are not strategies associated with the factors Larry or academics expect to have outsized long-term returns. It's deceiving to assume the smart beta strategies are all focused on positive expected excess return.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by Levett » Sat Sep 30, 2017 5:42 pm

"Vanguard says it was always a question of semantics."

It often is. ;-)

Lev

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nedsaid
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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by nedsaid » Sat Sep 30, 2017 9:25 pm

I too have a concern that the Smart Beta/Factor strategies will get overgrazed. Because I believe the factors to be largely based upon human behavior, I would expect this effect to be temporary. At some point, people get bored and move on to something else. Right now, a "Dumb Beta" strategy of simply buying the broad indexes seems pretty smart.
A fool and his money are good for business.

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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by stratton » Sun Oct 01, 2017 9:30 am

munemaker wrote:
Fri Sep 29, 2017 11:16 pm
Seems like everyone is doing everything they can to slow down the $$ inflows into Vanguard.
Less active investing threatens Bloomberg's terminal business which is 80 to 85% of their income.
All Bloomberg Terminals are leased in two-year cycles (in the late 1990s and early 2000s, three-year contracts were an option), with leases originally based on how many displays were connected to each terminal (this predated the move to Windows-based application). Most Bloomberg setups have between two and six displays. It is available for an annual fee of $20,000 per user ($25,080 per year for the small number of firms that use only one terminal).[3] As of October 2016, there were 325,000 Bloomberg Terminal subscribers worldwide.
https://en.wikipedia.org/wiki/Bloomberg_Terminal

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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by munemaker » Sun Oct 01, 2017 9:44 am

I think competitors are doing everything they can to slow down the massive transfer of their assets under management to Vanguard. That's the real reason for this article IMHO.

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Re: Bloomberg: Smart Beta Debate Sparks Identity Crisis at Vanguard

Post by columbia » Mon Oct 02, 2017 8:53 pm

Since 2015, it’s launched three more global factor mutual funds and eight factor ETFs abroad.
That have?

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Re: "Smart Beta is dumb beta"

Post by VictoriaF » Tue Oct 03, 2017 8:50 am

Taylor Larimore wrote:
Fri Sep 29, 2017 9:14 pm
Bogleheads:

The famous investor Jeremy Grantham once quipped “Smart Beta is dumb beta plus smart marketing.” (Source: Google)

Best wishes.
Taylor
Brilliant! Thank you, Taylor,

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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