Scientific Beta

IPE: "Our research has shown that it is possible to use a smart beta benchmark as a starting point for an active stock-picking strategy. The results show that for the same capacity to select outperforming stocks, active managers who adopt a smart beta benchmark transfer their stock-picking value on top of this new benchmark. They ultimately benefit from the double added value of the stock picking and the smart weighting scheme that allows them to continue to outperform smart beta index investing."

IPE June 2013

(...) Far from being a threat to traditional active management, smart beta could represent a great opportunity for active managers, argues Noël Amenc. (...) Our research has shown that it is possible to use a smart beta benchmark as a starting point for an active stock-picking strategy. The results show that for the same capacity to select outperforming stocks, active managers who adopt a smart beta benchmark transfer their stock-picking value on top of this new benchmark. They ultimately benefit from the double added value of the stock picking and the smart weighting scheme that allows them to continue to outperform smart beta index investing. We also observe that asset management firms that have decided not to enter the competition on pure passive investment, but which have fundamental and quantitative research capabilities, can successfully develop so-called ‘active’ smart beta strategies that outperform smart beta indices. These indices should moreover be considered as references for measuring the performance and risks of these new active smart beta strategies. (...) Far from being a threat, the convergence between active investment and passive investment could be a fantastic opportunity for active investment. Today, there are more smart beta indices than stocks. These are great ingredients either for added value from diversified managers who will favour selection and diversification of these smart beta building blocks, or for managers who will be able to analyse the sensitivity of the smart beta building blocks to market conditions and, using their timing capacity in those conditions, to construct tactical allocation strategies between the building blocks. In both cases the added value to be created is enormous and justifies higher management fees than for simple replication of an index. The value proposition of active allocation between smart betas is all the greater in that unlike stocks, smart beta indices or building blocks are exposed in a very stable way to risk factors that are highly decorrelated and to specific risks that are measurable and fairly easy to diversify. These two qualities constitute the Holy Grail for all asset allocators and more globally for all managers. (...)