Scientific Beta

Scientific Beta’s investment philosophy makes a clear distinction between financial and non-financial objectives. Financial objectives, such as long-term outperformance relative to a cap-weighted benchmark, can be achieved by taking exposures to consensus rewarded risk factors and by diversification of unrewarded risks. These two pillars are at the root of our Smart Beta 2.0 framework. Indeed, cap-weighted indices suffer from concentration, which exposes investors to idiosyncratic risks and negative exposures to risk factors, which penalise their long-term performance. Scientific Beta multi-factor indices are therefore built to overcome these two shortcomings.

The use of a consistent top-down approach enables the creation of individual factor indices with strong exposures to academically validated risk factors that enjoy a strong economic rationale. This is possible thanks to the selection of stocks with desired characteristics (such as value or momentum) as well as to our High-Factor-Intensity filter that removes stocks with poor factor interactions and favours single smart factor indices with positive exposures to all risk factors, hence promoting a good factor intensity. The diversification of unrewarded risks enables the reward of factors to be efficiently captured and delivers the highest risk-adjusted performance over the long term. In addition, Scientific Beta multi-factor indices are obtained by combining individual factor sleeves using a naïve diversification. This is essential to achieve a strong factor deconcentration and benefit from factor decorrelation in order to obtain a robust outperformance over the long-term. Lastly, Scientific Beta offers risk control options that give the choice to investors to control for hidden or implicit risks that come with factor investing. Indeed, tilting stock selection towards risk factors generates sector deviations or can lead to stocks with lower market beta relative to the cap-weighted index. Similarly, the defensive nature of factor indices is only true on average and factor indices suffer from volatility risk. Even if these risks are unrewarded over the long-term, we believe, contrary to many competitors, that it is paramount for investors to be aware of these hidden risks and to have the explicit choice to control for them or not according to their own investment objectives.

Non-financial objectives such as the incorporation of ESG and Low Carbon policy should not be confused with financial performance. Indeed, there is no academic consensus of a long-term reward associated with an ESG or a green factor. For instance, the carbon premium or alpha that is claimed by some asset managers or index providers completely disappears when using consensus risk factors. Therefore, it would be a nonsense and even fallacious to add an ESG or Low Carbon factor to the factor menu since only exposures to rewarded risk factors can offer a potential for long-term outperformance. Ergo, mixed-up strategies offered by many competitors are conceptually wrong and deceitful as they promote false promises of outperformance based on ESG or Low Carbon criteria. Unlike its competitors, Scientific Beta incorporates non-financial objectives based on a strict exclusion policy that is done at the universe level. First, exclusions are applied and then financial objectives are targeted using the Smart Beta 2.0 framework described previously. Overall, this integrated top/down ESG approach enables the benefits of ESG or Low Carbon strategies to be captured by clear exclusion policy while limiting the cost for the investor of being exposed to a false factor and offer a consistent engagement policy.

Scientific Beta multi-factor indices rely on a clear investment philosophy that is based on academic foundations of empirical asset pricing and portfolio construction. This top-down approach enables the reconciliation of both financial and non-financial objectives in a consistent manner.

Finally, Scientific Beta offers explicit options to control for the implicit risks that stem from factor investing or to target ESG and/or Low Carbon goals, in order that each investor can satisfy their unique investment objectives.