Smart beta's funny and risk parity is even worse.

That's what Morningstar's John Rekenthaler takes away from GMO [profile] asset allocator James Montier's December white paper, "No Silver Bullets in Investing (just old snake oil in new bottles)". Rekenthaler lays out Montier's criticisms of smart beta (it's just biasing towards small value and the like, which GMO sees as expensive right now) and risk parity ("the antithesis of everything at GMO we hold dear").

Rekenthaler generally agrees with Montier's points, adding that a risk parity strategy in 2007 would have overweighted stocks because of low volatility, right in advance of the plunge, while in 2009 it would've underweighted stocks because of their volatility as the recovery in stock prices got underway.

"A sophisticated, mathematical version of buying high and selling low is sophisticated and mathematical — but it loses money just the same," Rekenthaler writes. 

Edited by: Neil Anderson, Managing Editor


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