By: Ronald J. Ryan, CEO, Ryan ALM, Inc.

We are happy to share with you the latest thinking from Ron Ryan. Ron has written a very interesting article on the “smartest beta“. There is beta, a term coined by Bill Sharpe. Smart beta, which is the optimization of the risk/reward behavior of a market index usually by changing the weights of the index’s constituents. Then there is the smartest beta. The “smartest beta” portfolio, as described by Ron, is the portfolio that best matches and achieves the true client objective of funding liabilities with the least amount of risk and cost.

Risk is best measured as the “uncertainty of achieving the objective”. Cost is the amount required to fund the objective. The true objective of most institutions and even individuals is some type of liability (annuities, banks, insurance, lotteries, NDT, pensions, OPEB, etc.). The absolute level of volatility of returns is not risk given a liability objective.

Please don’t hesitate to reach out to us if you’d like to explore the concept of the “smartest beta” in greater detail. We’d welcome that opportunity.