Scientific Beta

In the December 2014 issue of the Journal of Indexes Europe, ERI Scientific Beta provides practical illustrations of multifactor allocations drawing on smart-factor indexes representing a set of four well-documented and popular risk factors (value, momentum, low volatility, and size) in an article entitled "A Multifaceted Approach to Index Investing", and Noël Amenc, CEO of ERI Scientific Beta, is invited to participate in a roundtable on the theme "Smart beta: The future of investing or marketing fluff?".

A Multifaceted Approach To Index Investing: Implementing multifactor equity portfolios with smart-factor indexes
Felix Goltz, Noël Amenc, Antoine Thabault
December 2014

Sophisticated institutional investors have increasingly started to review factor-based equity investment strategies. For example, the parliament of Norway, which acts as a trustee for the Norwegian Oil Fund, commissioned a report on the investment returns of the fund. This report was requested after the fund’s performance fell short of the performance of popular equity market benchmarks. The resulting report (Ang, Goetzmann and Schaefer [2009]) showed that the returns relative to a cap-weighted benchmark of the fund’s actively managed portfolio can be explained by exposure to a set of well-documented alternative risk factors. After taking into account such exposures, active management did not have any meaningful impact on the risk and return of the portfolio. The authors argue that such exposures can be obtained through purely systematic strategies without a need to rely on active management. Therefore, rather than simply observing the factor tilts brought by active managers ex-post, investors may consider which factors they wish to tilt toward and make explicit decisions on these tilts. This discussion of active managers’ sources of outperformance has naturally led to factor indexes being considered as a more cost-efficient, straightforward and transparent way of implementing such factor tilts. 

Smart Beta Roundtable: The future of investing or marketing fluff?
With the participation of Noël Amenc, PhD, Director, EDHEC Risk Institute, and CEO, ERI Scientific Beta
December 2014

Smart beta promises enhanced risk-adjusted returns. But does it deliver? The Journal of Indexes Europe has gathered the sharpest minds in indexing to discuss where the industry is heading, how smart beta has performed to date, and how regulatory changes could shape this category in the future.

JOI Europe: Are we seeing the next generation of smart beta yet?

Amenc: Over the past two years, the concept of multi-beta or multi-smart-beta has become popular. This popularity actually corresponds to two concerns on the part of investors. The first relates to the poor factor diversification of first-generation indexes. The second corresponds to a desire to implement an approach in terms of factor investing. We think that this development is only an incomplete evolution in smart beta offerings. Investing in factors with poorly diversified factor indexes does not take best advantage of the factor investing concept. By combining smart factors that are well rewarded over the long term such as Value, Momentum, Mid-Cap and Low Volatility, it is possible to construct multi-smart-beta indexes with attractive performance and limited relative risk. As such, the Scientific Beta World Multi-Beta Multi-Strategy indexes that are equally weighted with these four factors have exhibited outperformance of 2.88 percent and maximum relative drawdown of only 6.87 percent compared to the cap-weighted index.