Scientific Beta

The Asset: "“There are two problems with cap weight indices by the nature of distribution of capitalization on the market. First, because large caps are dominant when you weigh your indices based on capitalization you are concentrated into large cap companies. Therefore you are not very well diversified,” says Frederic Ducoulombier, founding director, EDHEC Risk Institute – Asia."

The Asset 14/07/2016

"(...) “There are two problems with cap weight indices by the nature of distribution of capitalization on the market. First, because large caps are dominant when you weigh your indices based on capitalization you are concentrated into large cap companies. Therefore you are not very well diversified,” says Frederic Ducoulombier, founding director, EDHEC Risk Institute – Asia. “Second, you are tilted toward large companies which tend to be growth companies over the long term and there are some academic studies that find if you tilt toward medium caps, small caps or towards value companies (not growth companies) you are better rewarded. So smart beta has tried to answer these problems,” he adds. A smart beta product that aims diversification can improve the efficiency of a portfolio through better weighting of the stocks and elimination of certain risks. Another type of smart beta product is factor-based ETFs, which enhances portfolio performance by changing the tilts toward factors that harvest risk premia – higher than what the broader market risk premium is over the long term. (...)"