ERI Scientific Beta unveils multi-factor smart beta indices

May 27th, 2014 | By | Category: ETF and Index News

ERI Scientific Beta, the smart beta indexing initiative spun out off EDHEC-Risk Institute, a Paris-headquartered financial research centre, has announced the launch of the SciBeta Multi-Beta Multi-Strategy Indices.

ERI Scientific Beta unveils multi-factor smart beta indices

Noël Amenc, CEO of ERI Scientific Beta.

The indices endeavour to address two potential limitations of market capitalisation-weighted indices, namely ill-suited exposures to systematic risk factors and excessive concentration in a small number of stocks.

The indices provide allocations to a selection of equity market risk factors – value, momentum, size and low volatility – that are very well rewarded over the long term.

Within each factor tilt, ERI Scientific Beta applies a “smart” weighting methodology to selected stocks so that the indices are not only exposed to the relevant factor, but also well diversified. The indices also benefit from the lack of correlation between the premia associated with these factors, because they correspond to different economic cycles.

While in practice many investors choose specific factor exposures according to their investment beliefs, objectives and constraints, the benefits of multi-factor allocations by way of an equal-weighted or equal relative risk contribution allocation are sizable, according to ERI Scientific Beta.

To this end, ERI Scientific Beta has developed the multi-beta multi-strategy indices to maximise diversification, benefitting from three levels of diversification: (i) diversify at the stock level to avoid concentration; (ii) diversify the weighting schemes to cancel any remaining model risk; (iii) diversify across sources of returns (factor premia) to obtain smooth outperformance.

Over the long run, the approach enables the benefits of smart beta to be doubled, with excess performance compared to the cap-weighted index of almost 4% per year and a gain in Sharpe ratio of 115%, according to Scientific Beta data.

Noël Amenc, CEO of ERI Scientific Beta, said: “Multi-beta multi-strategy indices allow equity investors to expand their opportunity set beyond the standard equity premium. These indices of indices are effective entry points for asset owners who wish to dispose of a robust and proven asset allocation solution.”

The indices and their underlying constituent data are available to investors via the initiative’s website. However, the indices could ultimately find their way into exchange-traded fund (ETF) format following the announcement earlier this year of a strategic partnership between Amundi, one of Europe’s leading ETF providers, and ERI Scientific Beta.

At the time of the announcement, Valérie Baudson, Global Head of ETF & Indexing at Amundi, said, “By partnering with ERI Scientific Beta we will be able to build on this approach by offering our clients efficient indexed managed solutions including the very latest in smart beta index construction expertise”, while Noël Amenc added, “We are very much looking forward to helping Amundi to provide its institutional clients with the most rigorously defined and best performing smart beta ETF & Indexed products.”

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