Scientific Beta

The latest "Scientific Beta" special issue of the Research for Institutional Money Management supplement to Pensions & Investments discusses a number of themes such as the importance of sticking with factor strategies through periods of crisis, the risk of crowding, the robustness of smart beta strategies, the place for an intangible-adjusted value factor, the compatability of ESG engagement and divestment, Scientific Beta's new dynamic defensive solution that is really low volatility, and its historical volatility adjustment risk control option for investors who want their factor strategy to remain defensive during episodes of severe market stress.

The latest "Scientific Beta" special issue of the Research for Institutional Money Management supplement to Pensions & Investments first discusses the question of why investors should stick with their factor strategies through periods of crisis. The main conclusion is that the importance of diversification across the six consensus risk factors remains intact.

We discuss crowding risk in smart beta strategies and find that assertions that the popularity of smart beta strategies will ultimately cancel out their benefits are not based on solid evidence.

We assess the robustness of a set of competitor and Scientific Beta indexes both from an index design point of view and through the lens of our robustness measurement protocol. We have developed a framework to assess robustness according to five different dimensions and assess whether or not the uncovered risks are acceptable given the objectives of a strategy.

Since the value factor proxy does not aim to capture the true value of a stock, including omitted intangible assets in the accounting book value is in line with the risk-based explanation for the value factor. We confirm in our article that an intangible-adjusted value factor adds investment value for multi-factor investors.

It is often argued that an investor who is dissatisfied with a company’s ESG behavior, and who wishes to remedy the situation, should stay on as a shareholder and engage with it. We show that far from being incompatible with ESG engagement, ESG filtering sends a clear and consistent divestment message that allows an effective engagement policy to be implemented.

Traditional defensive solutions suffer from negative exposures to reward factors other than the low-volatility risk factor, as well as concentration and strong exposures to fixed-income risks. More importantly, they can suffer from huge peaks of volatility during market crises. Scientific Beta offers a new dynamic defensive solution that is really low volatility by combining a robust low-volatility index and a maximum volatility protection risk-control option.

Investors who want their factor strategy to remain defensive during episodes of severe market stress would benefit from the application of a volatility-control option. We present the historical volatility adjustment (HVA) risk-control option.