Speed Racer & Smart Beta: What’s in a Name?

To say I am a big fan of Speed Racer might be an understatement. When I was a kid, we got out of school at 3:15 and I would run home every day to catch Speed Racer at 3:30 on UHF (we only had five channels back then). Speed and his extended family traveled the world racing the Mach 5 (their car) with adventures and hijinks along the way. Despite my age, I guess I never quite escaped the “spell” of the show. In addition to my many tchotchkes, I have a cat named Speed (the Elvis-mixed-with-James-Bond hero of the show), a dog named Trixie (his girlfriend) and a bird named Spritle (his little brother). However, the true power of a good name is the feeling and/or image it conveys without additional explanation. Even without my basic synopsis of a 70’s anime show that many of you have never seen, you probably understand the gist of what it was all about–it’s all in the name. He’s a racer and he’s speedy; there’s not much more to it.

Clever names are not always as innocently intended or as accurately descriptive as Speed Racer’s. For instance, marketing firms have been naming consumer products for decades to invoke emotion and action. It probably started with the, now classic, “New and Improved” product lines, which have now morphed into the current, wallet-draining “Natural” and “Organic” labels that crowd today’s grocery shelves.

Unfortunately, financial markets are not immune from this creative naming practice in their attempt to gather and keep portfolio assets. Put simply, financial firms need to sell products. To do so, they have to induce investors to commit their dollars in a “grocery store” full of choices competing for their assets. Some of my favorites are “absolute return” and ”unconstrained bond” strategies. The phrase “absolute return” is not inherently evil, nor is it necessarily a bad strategy for certain portfolios. However, the name implies and invokes the misleading image of nothing but positive performance. Can you lose money? Of course you can; it’s an investment in the capital markets. “Unconstrained bond” is a trickier oxymoron to decode in that the use of the word “unconstrained” implies no limits (that’s good, right?) while “bond” implies stability (who doesn’t want that?). Unfortunately, the volatile results in these strategies are not likely what an uneducated investor expects from either term.

Today’s “Mammoth Car” (yes, that’s another Speed Racer reference) of naming conventions in the investment world is “smart beta” strategies. Basically, smart beta strategies represent index funds that are constructed and rebalanced in just about any way other than a traditional, passive market, capitalization-based index like the S&P 500. These rules-based, transparent strategies allow investors to allocate or tilt their portfolios to different investment factors, such as value, quality, momentum, etc. in a very cost-effective manner. While smart beta strategies are more expensive than traditional capitalization-based index funds, they do offer investors the ability to construct portfolios using many of the same factors that active investment managers use to build portfolios with much higher fees.

This class of strategies is actually a very viable investment opportunity to consider for certain portfolios, so the concern was never the underlying value of factor-based investment strategies. The issue is the “smart” moniker this group of strategies just cannot seem to shake. “Smart” implies one thing: you’re dumb if you do not invest in it, which is simply not true. Although there is ample research to support the viability of factor-based investing, all smart beta strategies are not smart, nor are they a panacea of portfolio construction. While “smart” is troubling enough as a strategy name, Wall Street knows a golden goose when they see it, and because we’re talking about competition for billions and billions of dollars in portfolio assets, the marketing machine is actually building up speed. Smart beta’s vernacular now includes dozens of emotion-invoking names like “advanced” and “scientific,” to name just a few. The dual goal of these various iterations is a tale as old as time- -to imply superior differentiation and gather portfolio assets, or as we often disappointingly call it, another normal day in the financial markets.

In an increasingly complex world of investment opportunities with buzzword-worthy strategies, it is imperative that investors remain focused on the ultimate goal of achieving their investment objectives. Investors need to look past assumptive nomenclatures that are inextricably intertwined with investment opportunities. Investment decisions should always be based on a true understanding of the investment strategy and its specific role in the portfolio, along with normal considerations of structure, cost, risk, and return expectations.

Let me leave you with one more Speed Racer truism–wherever Chim-Chim (their pet chimpanzee) goes, trouble isn’t far behind.