Book Review: Equity Smart Beta and Factor Investing for Practitioners

Equity Smart Beta and Factor Investing for Practitioners. 2019. Khalid Ghayur, CFA, FSIP, Ronan G. Heaney, and Stephen C. Platt, CFA. Wiley.

For many years, the investment profession has debated the merits of passive and active investing. On the one hand, proponents of passive investing have invoked the concept of efficient markets, as well as the cost savings and greater transparency that arise from investing in index funds. On the other hand, advocates of active investing argue that a savvy manager can add value through security selection or dynamic asset allocation. Much of the literature over the past two decades indicates that some inefficiencies exist that can be exploited.

Are strategies available that can benefit from the lower costs of index investing while still allowing the portfolio to benefit from inefficiencies? Smart beta strategies are an attempt to capture the benefits of both active and passive investing.

In Equity Smart Beta and Factor Investing for Practitioners, Khalid Ghayur, CFA, Ronan G. Heaney, and Stephen C. Platt, CFA — all Goldman Sachs employees — provide practitioners with a comprehensive guide to equity smart beta investing.

Unlike many books for practitioners that ignore the
research motivating the strategy discussed, this book thoroughly reviews the
academic literature that constitutes the basis for smart beta strategies. The
authors detail both the relevant empirical studies and their own simulations to
provide a theoretical basis for this approach. The book is sufficiently
rigorous that it could be used as a supplemental text in a graduate-level
course on stock market anomalies.

The volume is divided into nine parts but actually consists of almost two separate books. The first section of the book is essentially a textbook that lays out the foundations of smart beta and the underlying academic research that supports expanding the model to include factors beyond beta. It also includes numerous simulations conducted by the authors to provide additional evidence in support of using smart beta strategies.

The second section of the book consists of chapters by the authors on how to implement smart beta strategies. This section includes interviews with and articles penned by practitioners on their experiences in implementing smart beta strategies, as well as two chapters dealing with retail offerings of smart beta strategies.

The authors have produced a comprehensive book on the topic of smart beta investing that can serve the needs of different individuals who are interested in smart beta investing. For those who are new to the topic and want to explore the theoretical underpinnings of it, the first section of the book can be used to gain a thorough understanding of the empirical work that forms the basis of many smart beta strategies. For those who are already well versed on the topic and are looking to initiate a smart beta strategy, the second section of the book addresses some of the implementation challenges.

To provide a range of perspectives, the authors have selected practitioners with a variety of backgrounds in the investment field. Readers benefit from the insights and experiences of pension fund managers, asset owners, and retail investors.

Equity smart beta investing, like other alternative strategies that profess to offer a superior method of portfolio construction, invites skepticism. The authors attempt to answer the critics in Chapter 20. Equity smart beta skeptics may want to start with this chapter before delving more deeply into the topic.

In summary, Equity Smart Beta and Factor Investing for Practitioners is a valuable read for both practitioners and academics. It serves as a comprehensive resource on the theoretical and empirical basis of smart beta strategies, as well as the challenges of implementing the strategies for institutional and retail investors.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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Ronald L. Moy, CFA

Ronald L. Moy, CFA, is associate professor of finance at St. John’s University, Staten Island, New York.