What's So Smart about Smart Beta?
Alpha is the return on an investment that is in excess of the expected return, given the investment’s level of risk. In a portfolio of securities, this excess return is attributed to the portfolio manager’s skill. This implies that it requires some form of active management, such as selecting securities (selection alpha) or timing a market, sector, or asset class correctly (timing alpha).
Beta is the return that a portfolio earns that can be attributed to the market as a whole, as opposed to returns that are attributable to a portfolio manager’s skill (alpha).
Price-to-book ratio is to compare the market value of a stock with its book value. Stocks with high price-to-book ratios may be overpriced. Stocks with low price-to-book ratios may be underpriced.
Dividend yield is equal to the dividend divided by the stock price. Dividend yield is one measure of a stock's value. A high dividend yield may indicate that a stock is relatively inexpensive.
Price-to-earnings ratio is the ratio of the share price to the earnings per share. This ratio is one measure of valuation.
Statistical significance refers to the likelihood that a particular research result is due to chance. A result that is statistically significant is one that has passed a test of significance, which is based on mathematical probabilities, and therefore is believed to represent a true result, not one that is due to chance. If a research result does not pass the statistical test, the result may be referred to as statistically indistinguishable from zero.
A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. Small cap stocks tend to be more volatile and can be less liquid than other types of stocks. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large companies. Larger companies may have slower rates of growth than smaller companies. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. No investing strategy can overcome all market volatility or guarantee future results.
Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.
Diversification does not guarantee a profit or protect against loss in declining markets.
The Russell 3000® Growth Index measures the performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 3000® Value Index measures the performance of those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth values.
Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.