Scientific Beta

Asia Asset Management: "Investing in smart beta requires the asset owner to understand the consequences of making this investment decision. Although gaining explicit exposure to priced risk factors such as value, low volatility, size, momentum or quality is expected to provide good long-term risk-adjusted performance, investing in these factors also exposes the investor to several hidden or implicit risks which could be important drivers of short-term performance."

Asia Asset Management March 2017

Article by Eric Shirbini, global research and investment solutions director, ERI Scientific Beta

"(...) A recent EDHEC survey on equity factor investing highlights that one of the primary motivations of asset owners to invest in smart equity factors was to replace costly active managers with indices representative of a choice of factors that are well-rewarded over the long term. In addition to providing access to well-rewarded risk factors at a lower cost compared to active managers, asset owners also benefit from having greater transparency and explicit control over which factors to invest in. Unfortunately, the decision on which single or multi-smart-factor index to invest in is often made simply on the basis of the lowest cost and recent performance. However, by making an explicit choice about which factors to invest in, the asset owner now also takes on the fiduciary responsibility of their investment choices, which in the past had been delegated to the asset manager. Investing in smart beta requires the asset owner to understand the consequences of making this investment decision. Although gaining explicit exposure to priced risk factors such as value, low volatility, size, momentum or quality is expected to provide good long-term risk-adjusted performance, investing in these factors also exposes the investor to several hidden or implicit risks which could be important drivers of short-term performance. (...)"