Scientific Beta

This study shows that most market indices used as a reference by investors are neither efficient nor stable in terms of style and sector exposure. This inefficiency and instability is a source of underperformance and poor risk management and results in a failure by investors to optimise the risk-return trade-off of their portfolios.

For the vast majority of European institutional investors, constructing a benchmark and measuring the performance of their portfolio in relation to the benchmark are central to their investment process. And, very often, the chosen benchmark is a market index and/or a combination of market indices.

Since their design is not affected by the securities chosen by managers and since they benefit from the sound reputation of major financial institutions, credit rating agencies and major international stock exchanges, market indices appear to be the ultimate reference not only for strategic allocation but also as a measure of investment management performance. Evaluating the quality of these indices as a benchmark is therefore a question that is essential to institutional investors.  

The results of this study clearly show that most market indices used as a reference by investors are neither efficient nor stable in terms of style and sector exposure. This inefficiency and instability is a source of underperformance and poor risk management and results in a failure by investors to optimise the risk-return trade-off of their portfolios.