Paul Murdock, Indexology Magazine Editor, recently sat down with Vinit Srivastava, Managing Director, to trace the origins of smart beta indexing. From early days, before it even had a name, to recent developments in multi-factor indexing, Vinit shares his perspectives on each step of the journey and weighs in on where smart beta may be headed.
PAUL: What were the first factors tracked by indices?
VINIT: Before the recent wave of single- and multi-factor indices (over the last five to seven years), dividend, value, and equal-weight indices had already been widely adopted. These indices and the funds tracking them sought to provide exposure to yield, value, and size—all well-established factors that have been known to have a risk premium. One of the reasons for the success of these early strategies was their simplicity, both in their construction and their implementation. In fact, many of these factor strategies were adopted by active managers long before passive solutions were available.
PAUL: How has the factor index landscape evolved since then?
VINIT: Over the last decade, we’ve seen the creation of single-factor indices, which seek to provide exposure to well-known risk factors like low volatility, quality, size, momentum, value, and yield. These have allowed market participants to take views on factors and combine them strategically or tactically. As the market has evolved, multi-factor strategies that provide exposure to multiple risk factors in a single package have become more common.
One of the main drivers of this was asset owners’ need for costeffective strategies that meet their objectives in an era when long-term return expectations from most asset classes are lower than they have been historically. In this kind of environment, the right risk/return characteristics are essential to meeting long-term liabilities.