“These [smart-beta type of investments] are not super strategies,” Bogle told an audience of investors at the Morningstar Institutional Conference in Hong Kong last week.
Bogle, who appeared in a live video feed, was interviewed by Jeff Ptak, Morningstar's global director of manager research.
Smart beta portfolios offer the benefits of passive strategies combined with some of the advantages of active ones. A smart beta strategy seeks to passively follow indices, while also taking into account alternative weighting schemes such as volatility or momentum, for example.
Bogle said when smart beta products first launched 10 years ago, some people believed that it would reshape the investment universe.
“I just think this is ridiculous, because you just have the same stocks [as index funds],” Bogle said.
Bogle added that smart beta funds have not delivered better returns over the last ten years when compared to the traditional index products.
Questioning active funds
Ptak told our sister publication Fund Selector Asia that Bogle, who founded the client-owned mutual fund company in 1975, was skeptical about active investing in general.
“I think he believes that [smart beta] is inferior to a more traditional approach to indexing, where one is weighting companies strictly based on market capitalisation. What he observes is that usually a smart beta strategy holds the same names of those companies that the index fund owns, but it is weighting them in a slightly different way. Perhaps you are trading a bit more often than you would, but he found that approach has not succeeded.” Ptak said.
Ptak said for Morningstar, smart beta is one of the choices that investors have along the active-passive spectrum.
“We agree with Bogle that it is a form of active management, so typically it is a lower-cost approach. [However], we are not necessarily biased against smart beta just because it happens to be a form of active management.
“Bogle has more austere views on active versus passive. He believes that in the vast majority of cases, active is an inferior choice. For us, there are some cases where active management can be successful,” Ptak added.
Other analysts, such as Mercer, believe that a tilting strategy "from beta to alpha”, is one method that could help institutional investors address the low returns coming from traditional investments.
Bogle also told the audience that the asset management industry should accept and promote the philosophy of putting investors first.
“Putting the investors first, in his mind, means doing everything you can to remove costs and putting the clients’ interest before your own. Too often, the industry puts salesmanship over stewardship, and he feels quite strongly that as an industry we should put stewardship before salesmanship,” Ptak said.