Scientific Beta

Among the highlights of the July 2014 monthly performance report for the ERI Scientific Beta indices, performance for multi-strategy smart beta indices exposed to risk factors known to be well rewarded over long periods remains strong with excess annual performance over broad cap-weighted indices ranging from 1.34% to 2.74% since inception for the Developed universe.

Recent years have seen the development of numerous smart beta indices whose weighting schemes depart from those of cap-weighted indices. Smart beta indices may be obtained by tilting economic factors, such as book-to-market, size or volatility, or by introducing greater diversification into the index, as illustrated in multi-strategy indices. The positive performance of smart beta indices over the long term has been largely documented in the literature. However, these indices are exposed to risk factors that differ from those of cap-weighted indices and that may cause variations in performance over short periods. As a result, the presentation of long-term performance is not enough for investors, who are also demanding performance figures over recent and shorter periods. The present report gives a complete picture of smart beta index performance with both long-term and short-term figures that illustrate the variations in performance over the different time periods, as well as the variations in performance between the various strategies. As a result, combining the various smart beta strategies makes it possible to obtain more robust performance.

Among the highlights of the July 2014 monthly performance report for the ERI Scientific Beta indices: 

• Year-to-date, the best performing strategy for the Developed Equity Universe is the Efficient Minimum Volatility strategy, both in absolute (6.39%) and relative terms (1.54%), while the worst, but still positively, performing strategy is the Maximum Deconcentration strategy, both in absolute (5.33%) and relative (0.48%) terms.

• The Diversified Multi-strategy index allows extremes to be avoided by diversifying across five weighting schemes and posts year-to-date relative return of 0.94%. Since inception in 2002, the Diversified Multi-strategy index for the Developed Equity Universe also has the lowest turnover. It appears that investing in the Diversified Multi-strategy index cancels out some of the transactions occurring in the single strategies. The turnover is only 25.9% per year. The low maximum relative drawdown of the Diversified Multi-strategy index since inception (4.07%) shows that combining several strategies leads to more robust performance over the long term.
  
  
• Since January 1, 1974 (40 years), all diversified multi-strategy indices exhibit a positive relative return compared to cap-weighted indices, with values ranging from 1.11% to 4.75% for the US universe. Performance for multi-strategy smart beta indices exposed to risk factors known to be well rewarded over long periods remains strong with excess annual performance over broad cap-weighted indices ranging from 1.34% to 2.74% since inception for the Developed universe.
  
  
• This month, the best performing index among smart factor indices for the Developed Equity Universe is the High Liquidity index with a relative return of -0.04% compared to a broad cap-weighted index, while the Low Liquidity index posted the lowest relative return (-1.12%).