Scientific Beta

Benefits and Pensions Monitor: "In their concern to maximize factor exposures, multi-factor index providers have favoured concentration of the indices to the detriment of their diversification, says an EDHEC Risk Institute working paper. ‘The Limitations of Factor Investing: Impact of the Volkswagen Scandal on Concentrated versus Diversified Factor Indices’ shows even though the excessive concentration of cap-weighted indices was one of the motivations for creating smart beta indices, solely taking the factor dimension into account ultimately leads to the indices exposing investors to considerable specific risks."

Benefits and Pensions Monitor 04/11/2015

"(...) In their concern to maximize factor exposures, multi-factor index providers have favoured concentration of the indices to the detriment of their diversification, says an EDHEC Risk Institute working paper. ‘The Limitations of Factor Investing: Impact of the Volkswagen Scandal on Concentrated versus Diversified Factor Indices’ shows even though the excessive concentration of cap-weighted indices was one of the motivations for creating smart beta indices, solely taking the factor dimension into account ultimately leads to the indices exposing investors to considerable specific risks. Ultimately, and going beyond the stocks, the excessive concentration of these indices meant that they considerably underperformed. With the Volkswagen scandal, the EDHEC Risk Institute and ERI Scientific Beta research teams stress that the robustness of multi-factor indices depends on both the balance of factor exposures and good diversification of specific risks. It is only on this double condition that an index can be qualified as smart. (...)"