Scientific Beta

Institutional Investor: "“With a traditional factor-based approach, there is greater exposure to stock-specific risk; you haven’t necessarily diversified away other risks inherent in the traditional factor approach,” says Eric Shirbini, global product specialist at ERI Scientific Beta. The ERI Scientific Beta approach to smart beta, or as they call it ‘smart factor’, will identify all the stocks to include in a particular factor-based index, but use a diversification-based weighting scheme. “That’s what had been missing in the market,” he says. (...)".

Institutional Investor September 2014

"(...) Smart beta is similar to factor investing, a concept that has been around for some time. But they are two different things. “With a traditional factor-based approach, there is greater exposure to stock-specific risk; you haven’t necessarily diversified away other risks inherent in the traditional factor approach,” says Eric Shirbini, global product specialist at ERI Scientific Beta. The ERI Scientific Beta approach to smart beta, or as they call it ‘smart factor’, will identify all the stocks to include in a particular factor-based index, but use a diversification-based weighting scheme. “That’s what had been missing in the market,” he says. (...) There is a lot of discussion about smart beta being an active or a passive strategy, and the truth lies in between. “Smart beta sits between the two,” says ERI Scientific Beta’s Shirbini. It is neither 100 percent active nor 100 passive. “It’s rules-driven, so it’s a passive style, but it does not passively just follow the market but also gives exposure to certain factors,” he adds. An important question arises: As smart beta grows, are investors replacing cap-weighted investments, or are they replacing active management? Investors recognize that cap-weighted investments are too concentrated, and there is concern about being overweight in large-cap growth stocks but even more importantly they are also beginning to realize that smart beta does what active managers do: value tilts, market segment tilts, momentum tilts,” he adds. (...) Because of decisive factor tilts and purposeful integration into portfolios, US investors typically see smart beta as more of an active strategy competing with other active managers, explains Shirbini at ERI Scientific Beta. European investors use it as more of a rules-based and semi-passive approach to achieving relative returns at a lower cost. In this context, there are two applications. “If an active manager is not performing, an asset owner can often replicate the strategy more efficiently and at a lower cost,” he says. In addition, when looking at overall exposures and evaluating risk, an asset owner can add a factor to balance and mitigate if there is too much in one particular area. “For example, if you’re overweight in value, you can add a growth smart beta strategy as part of the asset allocation decision,” he says. (...)"