Scientific Beta

Portfolio Adviser: "But which factors matter the most when it comes to working which large/mega caps to buy for a fund or portfolio? The most systematic attempt to answer this challenge has come from the French business school EDHEC. Their Scientific Beta project (at www.scientificbeta.com) has identified a wide range of factors using a 40 year slug of data from the US equity markets."

Portfolio Adviser 19/05/2014

"(...) But which factors matter the most when it comes to working which large/mega caps to buy for a fund or portfolio? The most systematic attempt to answer this challenge has come from the French business school EDHEC. Their Scientific Beta project (at www.scientificbeta.com) has identified a wide range of factors using a 40 year slug of data from the US equity markets. This analysis focuses on the largest 500 stocks in terms of market cap - EDHEC have then chosen to focus their analysis on four main factor strategies: Low volatility based on weekly returns over past two years; Value - book to market ratio; Momentum - cumulative return over the past year relative to wider market; The size effect - smaller companies based on market cap tend to outperform over the longer term. In the EDHEC series of factors this involves a mid cap rather than small cap bias. But EDHEC also adds in another crucially important layer of ‘stock selection’ - rather than looking to eliminate certain stocks using a factor bias, they look to achieve maximum ‘diversification’ between different stock “risks”. Five main diversification strategies feature in the EDHEC Scientific Beta approach, all based around an alternative approach to simply market cap weighting an index. (...)"