Scientific Beta

Moneyweb: "As Erik Christiansen from the EDHEC-Risk Institute points out, there are two major criticisms of market cap-weighted indices. “The first one is a problem of concentration,” he notes. “In South Africa you are very well aware of this problem because it is even worse here than in other markets.” At the moment, just one stock – Naspers – makes up over 17.0% of the FTSE/JSE All Share Index."

Moneyweb 06/07/2017

"(...) As Erik Christiansen from the EDHEC-Risk Institute points out, there are two major criticisms of market cap-weighted indices. “The first one is a problem of concentration,” he notes. “In South Africa you are very well aware of this problem because it is even worse here than in other markets.” At the moment, just one stock – Naspers – makes up over 17.0% of the FTSE/JSE All Share Index. The top ten companies together have a weighting of over 50%. What this means is that even though there may be 160 stocks in the index, you are not truly exposed to all of them. The weightings of the smaller companies are too meagre for them to have any material impact on the index performance. “Secondly, you also have some unfortunate factor exposures in market cap-weighted indices,” Christiansen notes. “By construction you are overweight large-cap companies, and you are also exposed more heavily to growth stocks.” That means you are tilted away from smaller value stocks, which, over time, should actually outperform. These concerns have given rise to new approaches that look to give investors exposure to other market factors. ‘Smart beta’ funds have been developed to focus on things like value, momentum, quality or low volatility. (...)"