ERI Scientific Beta releases a new series of indices with high factor exposure

ERI Scientific Beta has announced a new series of Multi-Smart-Factor indices that benefits from the results of the research conducted by its research teams reconciling a top-down approach with the search for strong factor intensity.

The aim of this Multi-Beta Diversified High Factor Exposure offering is to conserve the advantages of explicit risk control and the diversification of specific risks, while allowing the interactions between factor indices, which can be negative, to be taken into account. These indices benefit from the application of a High-Factor-Exposure filter that eliminates, for a smart beta index that is exposed to the desired factor tilt, the stocks that have undesired exposures to the other factors. This elimination of multi-factor losers conserves the desired factor exposure and significantly increases the factor intensity of the index. Within the context of its Multi-Beta Diversified High-Factor-Exposure indices, Scientific Beta offers two series of flagship indices:

• Multi-Beta Multi-Strategy Diversified High-Factor-Exposure Equal-Weight (EW) indices, available in four-factor, six-factor or Quality versions. These indices correspond to an equal-weight allocation to Diversified Multi-Strategy High-Factor-Exposure single smart factor indices.
• Multi-Beta Multi-Strategy Diversified Max Factor Exposure indices that are representative of a dynamic allocation between the components of multi-strategy factor indices. This solution has no equivalent on the market in terms of risk control.

Long-term evaluation (40 years - 1975-2015 US Data) of the Multi-Beta Multi-Strategy Diversified High-Factor-Exposure Six-Factor EW index shows that the excess annual return in relation to the cap-weighted equivalent is 3.67% and that the improvement in the Sharpe ratio is 97.2%.

On the occasion of the public announcement of this new offering, Professor Noël Amenc, CEO of ERI Scientific Beta, said, "With the Scientific Beta Multi-Beta Diversified High Factor Exposure indices, we show that it is not necessary, as other index providers have done, to abandon the top-down approach, and therefore control over the investment risks, in favour of a bottom-up-type approach based on concentrating portfolios in factor champions, with the corollary of increased turnover, instability in geographic and sector factor exposures, and of course very poor diversification of specific risks. We think that it is in investors' interests not to give up on sound risk management in order to increase the factor intensity of their portfolios. That is the aim of the Multi-Beta Diversified High Factor Exposure offering, which reconciles specific risk diversification, factor exposure control and high factor intensity."

More details on this new offering can be found in the Scientific Beta Multi Smart Factor Indices: An Introduction white paper, accessible here.

As part of its policy of transferring know-how to the industry, EDHEC-Risk Institute has set up ERI Scientific Beta. ERI Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.
ERI Scientific Beta, 1 George Street, #07-02, Singapore 049145. For further information, please contact: [email protected], Web: www.scientificbeta.com.

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