Scientific Beta

Eric Shirbini from ERI Scientific Beta participated in four roundtables organised by Pensions Expert on the subjects of how defined contribution schemes should approach smart beta, wherther there is a risk of crowding in smart beta, and what is drawing UK pension schemes to smart beta.

Pensions Expert 26/05/2017

Roundtable: How has the smart beta sector evolved?
"(...) How has the smart beta market developed? Eric Shirbini from ERI Scientific Beta, Julien Barral from bfinance, Alan Pickering from Bestrustees, James Price from Willis Towers Watson and Paul Black from Capital Cranfield discuss the range of new opportunities and how the sector has changed. (...)
Eric Shirbini: Smart beta used to be a kind of catch-all phrase for many different strategies. One category of smart beta is where you simply aim at better diversification, so it is strategies like equal weight, risk-parity weights and so on. The other category of smart beta is what has traditionally been called factor investing, and the idea here is to capture factors that are well rewarded over the long term. That is the original concept of smart beta that we saw about 10 years ago. Since then, we have built strategies that capture both of those elements in a single strategy, both diversification and factors to provide smoother returns through time. So that has been one evolution. The second evolution has been combining factors, because factors are risky. (...) More recently we have had other things, like incorporating these strategies with environmental, social and governance criteria and low-carbon criteria. (...)"

Roundtable: How DC schemes should approach smart beta
"(...) How should defined contribution schemes approach smart beta, and how will environmental, social and governance focused investment change the sector? Eric Shirbini from ERI Scientific Beta, Julien Barral from bfinance, Alan Pickering from Bestrustees, James Price from Willis Towers Watson and Paul Black from Capital Cranfield discuss. (...)
Pensions Expert: How should DC trustees go about choosing between multi-factor products and individual factors?
Eric Shirbini: I agree on using multi-factor products. Also, to reiterate Alan’s point, if it is good for DB, why should it not be good for DC? It is for exactly the same reasons: you are trying to generate slightly higher returns, you are trying to reduce costs, you are trying to generate higher yield. The hurdle is education. It is really a question of getting to grips with what it is about. Plain vanilla products are probably more suitable, because you are not trying to mix or customise your smart beta product with specific active funds. A DB scheme may have a whole range of active funds, so it may want to find particular factors that fit in. A DC scheme will probably be looking at this to try to reduce costs and improve returns. (...)"

Roundtable: Is there a risk of crowding in smart beta?
"(...) Is there a risk of factor‑based portfolios becoming crowded, with increasing popularity potentially leading to overpricing and lower future returns? Eric Shirbini from ERI Scientific Beta, Julien Barral from bfinance, Alan Pickering from Bestrustees, James Price from Willis Towers Watson and Paul Black from Capital Cranfield debate whether crowding really is an issue within smart beta. (...)
Eric Shirbini: I do not know what people mean by crowding with regard to smart beta. I know what it means when you talk about hedge funds, but as far as risk factors are concerned, there is no such thing as crowding. The biggest risk factor of all that you have is the equity market risk factor, the FTSE 100 itself. Can you turn around and tell me when the FTSE 100 is crowded? It is impossible to know when risk factors are crowded, or when they are going to go up or down. All you have to do is look at the low volatility factor very recently. People have been talking about low volatility being crowded for the past two years and nothing ever happened. (...)"

Roundtable: What drives the appetite for smart beta among UK pension schemes?
"(...) What is drawing pension schemes to smart beta? Eric Shirbini from ERI Scientific Beta, Julien Barral from bfinance, Alan Pickering from Bestrustees, James Price from Willis Towers Watson and Paul Black from Capital Cranfield discuss transparency and trustee training. (...)
Eric Shirbini: In terms of the main drivers, people are looking for more total returns. But the other point we have not discussed is that what you get with smart beta is an index strategy that is transparent. Yes, you have to do a lot of homework. All the work is up front, understanding how they are constructed. Once you have got to grips with them you are able to see what you are holding. With active managers, you do not know what you are necessarily holding – so I think transparency is important. The benefit of being transparent does not mean you just know the securities you are holding, but you also understand how the strategy is constructed, which means people can challenge your approach, which will ultimately lead to improvements. Furthermore, transparency leads to lower costs. (...)"