Scientific Beta

This Scientific Beta special issue of the Research Insights supplement in partnership with Investment & Pensions Europe (IPE) examines a number of topics in the area of smart beta investing. Articles discuss the benefits of combining various factor strategies, the reconciliation of environmental and financial objectives using low carbon indices, the benefits of multi-smart factor indices for emerging markets, defensive solutions and indices, the live performance of Scientific Beta's multi-beta multi-strategy indices, and the current offerings in the world of multi-factor indices.

This Scientific Beta special issue of the Research Insights supplement to IPE first clarifies the conceptual underpinnings and the need for diversification in factor investing, discusses the benefits of combining various factor strategies, the evolution of multi-factor allocation in recent times and the key features that distinguish the various multi-factor offerings.

We show that it is possible to reconcile environmental and financial objectives using low carbon indices. While these indices achieve an environmental objective by excluding high carbon stocks, and thus putting pressure on high polluting companies to reform, they achieve a financial objective by retaining exposure to rewarded risk factors and by maintaining a high level of diversification.

We analyse the benefits of multi-smart factor indices for emerging markets. We make a case for avoiding country bets for emerging market indices, by highlighting the fact that applying country neutrality is better than taking high tracking error risk, by not being country neutral, when it is not rewarded.

On the subject of defensive solutions and indices, we present three separate articles. We start by looking at the concepts underlying low risk equity strategies. We then introduce alternative approaches to limiting concentration in minimum and low volatility strategies. Finally, we introduce solutions which rely on a risk-based allocation model to dynamically allocate to smart factor indices carrying long-term risk premia, with a view to delivering a dissymmetric defensive profile.

We look at the live performance of Scientific Beta Multi-Beta Multi-Strategy indices. Live performance does not benefit from hindsight in the way that back-tests potentially can, so the key question for investors is not back-tested performance, but the live performance they will ultimately experience when adopting indices.

Finally, we review the current offerings in the world of multi-factor indices and look at the conceptual considerations involved in designing the different approaches. The key issues that we discuss involve the robustness and consistency of the multi-factor indices as well as the (lack of) diversification among the various products.