Scientific Beta

FT Adviser: "Although smart beta – such as creating an index based on dividends or earnings – can provide a “partial answer” to the main shortcomings of market-cap weighted indices, the study claimed investors would benefit from a “smart-factor index”. It said: “This works by constructing indices that explicitly seek exposures to rewarded risk factors and diversifying away from unrewarded risks”."

FT Adviser 29/10/2014

"(...) Smart beta investing needs to go one step forward to help investors build diversified portfolios of passive funds, a research paper from French business school EDHEC has found. The 96-page academic paper, Risk Allocation, Factor Investing and Smart Beta: Reconciling Innovations in Equity Portfolio Construction, said conventional stock market indices are market-cap weighted, so performance is often skewed towards the largest stocks on the index. Although smart beta – such as creating an index based on dividends or earnings – can provide a “partial answer” to the main shortcomings of market-cap weighted indices, the study claimed investors would benefit from a “smart-factor index”. It said: “This works by constructing indices that explicitly seek exposures to rewarded risk factors and diversifying away from unrewarded risks”. This is done largely through stock selection and calculating the risk/reward profile of each stock. According to the study: “The results we obtain suggest that such smart factor indices lead to considerable improvements in risk-adjusted performance.” (...)"