Scientific Beta

The December 2016 edition of the Research for Institutional Money Management supplement to P&I is a smart factor indexing special issue, looking at how factor indexes have evolved, how to reconcile environmental and financial objectives using low carbon indexes, the difference between defensive strategies and the low risk factor, alternative approaches to limiting concentration in minimum and low volatility strategies, dynamic strategies that are defensive when needed, and the live performance of multi smart factor indexes. 

The December 2016 edition of the Research for Institutional Money Management supplement to P&I is a smart factor indexing special issue.

A first article starts by clarifying the conceptual underpinnings and the need for diversification in factor investing, discussing 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 then show that it is possible to reconcile environmental and financial objectives using low carbon indexes. While these indexes 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 present three separate articles on the subject of defensive solutions and indexes. We start by looking at the concepts underlying low-risk equity strategies and the distinction between exposure to a defensive strategy and benefiting from the reward to the Low Risk factor. 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 indexes carrying long-term risk premia, with a view to delivering a dissymmetric defensive profile.

In a final article, we look at the live performance of Scientific Beta Multi-Beta Multi-Strategy indexes. Live performance does not benefit from hindsight in the way that backtests potentially can, so the key question for investors is not backtested performance, but the live performance they will ultimately experience when adopting indexes.