The launch of EDHEC-Risk Institute’s Scientific Beta platform, the culmination of a €6 million investment and more than two years of research and development, is yet another mark of the immense innovation and intense competition that is fizzing through the index industry.
Professor Noël Amenc, CEO of Scientific Beta.
With its Scientific Beta initiative, EDHEC-Risk Institute aims to further spice up this industry and establish itself as a leading provider of alternative, so-called smart beta, indices.
To achieve these lofty ambitions, the French academic institution espouses a new approach to smart beta investing – what it refers to as ‘Smart Beta 2.0’ – which enables investors to choose and control the risks of benchmarks. Second, it has committed itself to providing total transparency on index methodology and composition. And third, it has taken the bold step to supply information on its flagship indices free of charge and not to impose ad valorem license fees on funds seeking to replicate these indices.
Tomas Franzén, Chief Investment Strategist of Andra AP-fonden and Chairman of EDHEC-Risk Institute’s International Advisory Board, said: “The Scientific Beta initiative is a major mover of the whole concept of using more appropriate equity indices, or rather better constructed equity portfolios. It is important to better understand the dynamics of different alternative weightings and, at least, to be better prepared for market episodes when market-cap indices actually outperform.”
Professor Noël Amenc, Director of EDHEC-Risk Institute and CEO of ERI Scientific Beta, added: “There is dual motivation behind the Scientific Beta initiative: to encourage a more transparent index market and to allow investors to better manage the risks of their investment in smart beta benchmarks.”
The initial line-up of flagship indices includes popular smart beta strategies in the area of diversification, specifically maximum deconcentration, maximum decorrelation, and low volatility. These will be added to over time with indices for other strategies such as style, fundamentally-weighted, factor replication, and optimal liquid. In a year’s time, Scientific Beta intends to have around one hundred free flagship indices that are representative of all the possible smart beta choices.
The decision to provide the flagship indices and underlying data free of charge has the potential to really shake-up of the index industry, which is already undergoing a period of accelerated change. While investors will mostly see this change as good news, industry executives, especially at index stalwarts such as MSCI, FTSE and S&P Dow Jones, may be more reticent. On the one hand, their industry is booming thanks to the popularity of exchange-traded funds (ETFs) and other index-linked investment products, while on the other it is facing strong internal competition, which is putting significant pressure on pricing.
This competition comes in many different guises, including, for example, from boutique index providers such as Structured Solutions and S-Network Global Indexes; to in-house providers such as Market Vectors and WisdomTree; to influential academic upstarts such as Chicago Booth’s CRSP; as well as traditional exchange operators such as Nasdaq OMX and ISE, both of which have recently beefed up their index businesses.
The arrival of EDHEC-Risk Institute’s Scientific Beta, which will sit in the academic camp alongside CRSP, further threatens the existing status quo. And with its not-insignificant resources, both in terms of academic brawn and financing, it is likely to quickly gain traction and be a force to be reckoned with, especially in the field of smart beta analytics. Whether their indices ultimately underlie ETFs and other investable products waits to be seen, but, given their fresh approach and unorthodox openness, their entry in to the market is certainly a welcome one.