Scientific Beta

Benefits and Pensions Monitor: "Sector risk is the main explanation, with the market beta bias, for the underperformance of many factor strategies in the last three years, says a publication from ERI Scientific Beta. ‘Managing Sector Risk in Factor Investing’ focused on a comparison between standard smart factor indices and their sector-neutral counterparts. It found sector-neutrality adds value in terms of reducing tracking error and short-term underperformance with respect to the reference cap-weighted index."

Benefits and Pensions Monitor 14/09/2018

"(...) Sector risk is the main explanation, with the market beta bias, for the underperformance of many factor strategies in the last three years, says a publication from ERI Scientific Beta. ‘Managing Sector Risk in Factor Investing’ focused on a comparison between standard smart factor indices and their sector-neutral counterparts. It found sector-neutrality adds value in terms of reducing tracking error and short-term underperformance with respect to the reference cap-weighted index. De facto, a large share of the underperformance attributed to factors in recent years actually relates to sector biases. Sector-neutrality nonetheless comes with costs in the form of higher volatility and lower factor intensity. Investors who wish to maximize the benefits of factor investing over the long term should, therefore, question the idea of protecting the short term through sector neutrality. It concludes that the choice of using the sector-risk-control option is a trade-off between investors’ aversion to short-term risks generated by sector risk and their willingness to harvest factor risk premia in the most efficient way to achieve the highest risk-adjusted performance over the long run. (...)"