Scientific Beta

This issue looks at how inflation risk can be targeted in equity investing and how dedicated portfolios can be built from robust exposures to inflation, with the aim of protecting investors from inflation surprises. We present two families of inflation-friendly equity indices that can be employed either in a long-term strategic allocation or as a short-term tactical tool in a satellite allocation. We also examine the small set of competitor inflation-sensitive strategies currently available in the marketplace. In further articles, we review the performance of rewarded factors in the US market since 2020 through the lens of two important characteristics, namely intangibility and social distancing, and explore the role of fossil fuel divestment in financing the energy transition.

The Autumn 2022 issue of the EDHEC Research Insights supplement to Investment & Pensions Europe is a Scientific Beta special edition.

In our first article, we look at how inflation risk can be targeted in equity investing and how dedicated portfolios can be built from robust exposures to inflation, with the aim of protecting investors from inflation surprises.

We introduce a new approach to overcome macroeconomic measurement challenges and construct dedicated equity portfolios that target desired exposures to surprises in inflation expectations. We present two families of inflation-friendly equity indices that can be employed either in a long-term strategic allocation or as a short-term tactical tool in a satellite allocation.

We then look at the small set of competitor inflation-sensitive strategies currently available in the marketplace. We review their main methodological choices and compare their quantitative profile relative to the Scientific Beta inflation indices.

In the area of factor investing, we review the performance of rewarded factors in the US market since 2020 through the lens of two important characteristics, which are intangibility and social distancing. These two characteristics were particularly important during the COVID crisis since lockdown measures affected companies with low intangible capital and companies that could not use teleworking to overcome social distancing measures. The losses incurred in 2020 are consistent with factor investing’s risk-based rationale and should be expected by investors. The long-term reward of the consensus risk factors will not disappear in the future, and factor strategies, if properly designed, will be able to deliver their promise of long-term risk-adjusted outperformance.

Finally, turning to climate finance, we explore the role of fossil fuel divestment in financing the energy transition. We show that investors need to make clear distinctions between different types of fossil fuels as their stranding risk and the pace of their net zero consistent phase-out differ widely. We also illustrate the pitfalls of fossil fuel divestment by looking at the European Union’s regulated Paris-Aligned Benchmarks (PAB).