Scientific Beta

The April 2017 edition of the Research for Institutional Money Management supplement to P&I looks at several topics in the field of smart beta. Here, we focus on articles that present the results of our research on smart beta replication costs, introduce a new approach that aims to maximize exposure to the long-term rewarded equity factors in a "top-down" framework in a robust and well-diversified manner, and assess the merits of the "top-down" and "bottom-up" approaches to multi-factor portfolio construction.

The April 2017 edition of the Research for Institutional Money Management supplement to P&I looks at several topics in the field of smart beta.

An article presenting the results of our research on smart beta replication costs provides an explicit estimate of costs applied to a range of strategies and shows the impact of using different implementation rules or stock universes. Our replication cost analysis is straightforward and can be easily applied to other strategies. This research was produced as part of the Amundi ETF, Indexing & Smart Beta "ETF and Passive Investment Strategies" research chair at EDHEC-Risk Institute.

A further article introduces a new approach with the objective of maximizing exposure to the long-term rewarded equity factors in a "top-down" framework, in a robust and well-diversified manner. Scientific Beta's Multi-Beta Diversified Max Factor Exposure index dynamically allocates across single-factor indexes in order to retain diversification benefits and obtain maximum exposure while maintaining balance across factors and reasonable diversification levels.

We also examine the respective merits of the "top-down" and "bottom-up" approaches to multi-factor portfolio construction. "Top-down" approaches assemble multi-factor portfolios by combining distinct sleeves for each factor, while the "bottom-up" methods build multi-factor portfolios in a single pass by choosing and/or weighting securities by a composite measure of multi-factor exposures. We find that focusing solely on increasing factor intensity leads to inefficiency in capturing factor premia, as exposure to unrewarded risks more than offsets the benefits of increased factor scores.