smart beta platform Choice: A More for Less Initiative for Smart Beta Investing Transparency: Clarity:

Transcription

1

2 2 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. ERI Scientific Beta aims to be the first provider of a smart beta platform to help investors understand and invest in advanced beta equity strategies. It has three principles: Choice: A multitude of strategies are available allowing users to build their own benchmark, choosing the risks to which they wish, or do not wish, to be exposed. This approach, which makes investors responsible for their own risk choices, referred to as Smart Beta 2.0, is the core component of the index offerings proposed by ERI Scientific Beta. Transparency: The rules for all of the Scientific Beta series are replicable and transparent. Clarity: Exhaustive explanations of construction methodologies are provided, as well as detailed performance and risk analytics. Established by EDHEC-Risk Institute, one of the very top academic institutions in the field of fundamental and applied research for the investment industry, ERI Scientific Beta shares the same concern for scientific rigour and veracity, which it applies to all the services that it offers investors and asset managers. A More for Less Initiative More Academic Rigour, More Transparency, More Choice,

3 for Smart Beta Investing More Analytics, More Risk Control, Less Expensive Part of EDHEC Business School, a not-for-profit organisation, EDHEC-Risk Institute has sought to provide the ERI Scientific Beta services in the best possible economic conditions. The ERI Scientific Beta offering covers three major services: Scientific Beta Indices Scientific Beta Indices are smart beta indices that aim to be the reference for the investment and analysis of alternative beta strategies. Scientific Beta Indices reflect the state-of-the-art in the construction of different alternative beta strategies and allow for a flexible choice among a wide range of options at each stage of their construction process. This choice enables users of the platform to construct their own benchmark, thus controlling the risks of investing in this new type of beta (Smart Beta 2.0). Scientific Beta Analytics Scientific Beta Analytics are detailed analytics and exhaustive information on smart beta indices to allow investors to evaluate the advanced beta strategies in terms of risk and performance. The analytics capabilities include risk and performance assessments, factor and sector attribution, and relative risk assessment. We believe that it is important for investors to be able to conduct their own analyses, select their preferred time period and choose among a wide range of analytics in order to produce their own picture of strategy performance and risk. Scientific Beta Fully-Customised Benchmarks The Scientific Beta Fully-Customised Benchmarks service enables investors and asset managers to benefit from its expertise and the ability to determine and implement their choice of stocks, weighting schemes, and absolute and relative risk constraints in keeping with their objectives. 3

4 4 A Unique Platform

5 The Scientific Beta suite of services is available on a single platform, which allows investors to access all information on the Scientific Beta indices directly, to carry out analyses of their risks, and to construct their own benchmarks from their own choices of risks. This unique platform of services is not only a powerful decision support and analysis support tool in the area of smart beta investing but also the means for ERI Scientific Beta to market these indices in the best possible conditions. of Services 5 The platform enables the sales and marketing costs that traditionally represent the bulk of index providers operating costs to be limited. The new means of distribution enables the prices of the services to be kept down and the greater part of the revenues to be devoted to research, innovation and the development of new index offerings

6 6 Our

7 ERI Scientific Beta consists of a team of 30 staff dedicated entirely to the design and production of the indices and related services. With a concern to provide worldwide client servicing, ERI Scientific Beta is organising the presence of its teams in Boston, London, New York, Nice, Singapore and Tokyo. The Research & Development Centre is located in Nice, France and is managed by Dr. Felix Goltz, Director of Research & Product Development at ERI Scientific Beta. Felix Goltz, PhD Research Director, ERI Scientific Beta Head of Applied Research, EDHEC-Risk Institute Organisation Both the external validation of the research and the research relationship with EDHEC-Risk Institute are managed by Professor Lionel Martellini, Senior Scientific Advisor of ERI Scientific Beta, and Scientific Director of EDHEC-Risk Institute. The headquarters are located in Singapore where the co-ordination of the Customer Services and Scientific Beta Fully-Customised Benchmarks activities takes place. Professor Noël Amenc, Director of EDHEC-Risk Institute, is the CEO of ERI Scientific Beta. For the administration of its IT infrastructure, ERI Scientific Beta uses cloud computing services Lionel Martellini, PhD Senior Scientific Advisor, ERI Scientific Beta Scientific Director, EDHEC-Risk Institute Professor of Finance, EDHEC Business School Noël Amenc, PhD CEO, ERI Scientific Beta Director, EDHEC-Risk Institute, Professor of Finance, EDHEC Business School 7

8 8 Smart More Academic Rigour,

9 ERI Scientific Beta proposes a new approach to investment in smart beta, enabling investors to manage the absolute and relative risks of such investments. Until now, advocates of smart beta strategies have preferred to highlight the advantages in terms of performance of benchmarks that are less concentrated than cap-weighted indices. This focus has often ignored the consideration of the risks, and especially of their control, that these new forms of indices can represent. Ultimately, Smart Beta 1.0 indices are solutions where the choice of risks is imposed upon the investor by the index provider. Whilst risk management lies at the heart of the allocation policies of all institutional investors, Smart Beta 1.0 indices can seriously undermine appropriate diversification as they overweight equity portfolios with regard to value and liquidity risks. The second generation of Smart Beta (2.0) clearly distinguishes between the stock selection and weighting phases. In doing so, it enables investors to choose risks to which they wish or do not wish to be exposed. This distinction is a key element of both risk management and of the performance of smart beta investments. Beta 2.0 More Transparency, More Risk Control 9 This can be completed by statistical or arithmetical control of risk factors (style, sector) within the actual portfolio optimisation process. Finally, as suggested by EDHEC-Risk Institute in recent research, if the objective of smart beta investment is to outperform capweighted indices, it would seem logical to control the risk of underperformance and therefore to integrate a relative risk constraint (tracking error) when constructing the investor s smart beta benchmark. Scientific Beta Indices propose this triple selection and control of risks for the whole range of smart beta strategies: Selection of the stock universe (large-cap, mid-cap, high liquidity, mid liquidity, high volatility, low volatility, value, growth, high dividend yield, low dividend yield) Implementation of risk factor exposure control (style or sector neutrality) Definition of an ex ante tracking error constraint

10 10 Scientific Beta More Choice, More Risk Control,

11 Scientific Beta Indices lie at the heart of ERI Scientific Beta s offering. They enable investors to avail of the most complete and transparent platform for investing in smart beta. The platform provides web access to numerous strategies and stock universes, which will continue to expand throughout the current year. As of 15 April, 2013, Scientific Beta provides access to 2,442 indices allowing for investment in a Smart Beta 2.0 approach, whilst at the same time controlling the systematic risks to which these new forms of benchmark are exposed. These 2,442 indices represent multiple options of weighting choices, corresponding to diversification or deconcentration strategies. During the course of 2014, additional strategies will be proposed within the context of the Scientific Beta offering, notably offers related to style indices (15/01/2014), fundamentally weighted strategies (15/04/2014), and factor replication (15/09/2014). Indices Less Expensive 11 These strategies are applied to a universe of very large-cap and mid-large-cap stocks, initially made up of the 2,000 largest capitalisations across all developed markets, and to which will be added 700 emerging stocks in September This choice of liquid stocks ensures that every Scientific Beta index is readily investable and that the calculated performance corresponds to that of the portfolio being replicated. In order to facilitate investment in smart beta strategies, Scientific Beta provides daily transparency. Furthermore, to guarantee reasonable execution cost for the smart beta strategies, all of the Scientific Beta Indices are subject to strict liquidity and turnover rules, the latter being limited to an annual one-way value of 30%, whatever strategies are used. Additional functionalities favouring investability in the Scientific Beta Indices are also available, such as the calculation of after-tax returns, and the production of indices hedged against currency risk.

12 12 Strategies

13 Scientific Beta Indices aims to offer a platform enabling investors to consult all of the popular smart beta strategies. However, this universality entails two limits. Firstly, we do not wish to promote strategies that are not based on a rigorously conceptual approach, but for which the past performance at least stems from a rigorous and transparent process where the risks have been documented and the methodology does not involve too many ad hoc choices which ultimately condition the sensitivity of performance during the period of historical track record simulations. This is why we are reticent, for example, to impose allocation constraints or parameter choices that are not backed by Modern Portfolio Theory or market consensus. The second is linked to our commitment to obtain robust and well-documented results when implementing smart beta strategies. Until the smart beta research has been approved by the scientific management team at EDHEC-Risk Institute, ERI Scientific Beta does not publish the corresponding indices. Such selectivity and validation enable us to affirm that the smart beta strategies and their implementation within the context of Scientific Beta Indices constitute a reference for the smart beta indices market, including for those investors who, ultimately, will choose to implement this type of strategy with another index provider. Concerning Smart Beta Equity, ERI Scientific Beta is planning to provide the following types of strategy: SciBeta Diversification Strategy Indices SciBeta Style Indices SciBeta Fundamentally Weighted Indices SciBeta Factor Replication Indices SciBeta Liquid Optimal Tracking Indices As of 15 April, 2013, the initial strategy category, SciBeta Diversification Strategy Indices, covers the following types of strategy: SciBeta Maximum Deconcentration SciBeta Diversified Risk Parity SciBeta Maximum Decorrelation SciBeta Efficient Minimum Volatility Sci Beta Efficient Maximum Sharpe Ratio To these mono-beta strategies are added the SciBeta Diversified Multi-Strategy Indices, which allow investors to diversify their benchmark over every deconcentration/diversification weighting scheme proposed by ERI Scientific Beta. 13

14 14 Scientific Beta More Transparency,

15 For many years, EDHEC-Risk Institute has called for free access by investors to data relating to reference indices. Indeed, we believe that making information available not only on returns but also on the current weighting of the stocks in the indices and their historical composition, are essential for investors to be able to carry out their due diligence on those indices with full independence. In this context, ERI Scientific Beta has taken the initiative of offering SciBeta Flagship Indices, covering the types of strategy promoted in each of the main index categories. Flagship Indices Less Expensive Thus, as of 15 April, 2013, thirty SciBeta Flagship Indices are available in the developed universe. These indices correspond to popular diversification and deconcentration strategies. Scientific Beta Flagship Indices summarise the vast offer of strategies available through Scientific Beta by focusing on the key weighting and stock selection schemes, and a selection of regional index universes. Scientific Beta Flagship Indices are freely available on the Scientific Beta website. Scientific Beta Flagship Indices Name Region Characteristic Strategy SciBeta United States High-Liquidity Maximum Decorrelation SciBeta United States High-Liquidity Maximum Deconcentration SciBeta United States High-Liquidity Diversified Risk Parity SciBeta United States High-Liquidity Diversified Multi-Strategy SciBeta United States High-Liquidity Maximum Sharpe Ratio SciBeta United States High-Liquidity Minimum Volatility SciBeta United States Low-Volatility Maximum Deconcentration SciBeta United States Value Maximum Deconcentration SciBeta United States Growth Maximum Deconcentration SciBeta United States High-Dividend-Yield Maximum Deconcentration SciBeta Eurozone High-Liquidity Maximum Decorrelation SciBeta Eurozone High-Liquidity Maximum Deconcentration SciBeta Eurozone High-Liquidity Diversified Risk Parity SciBeta Eurozone High-Liquidity Diversified Multi-Strategy SciBeta Eurozone High-Liquidity Maximum Sharpe Ratio SciBeta Eurozone High-Liquidity Minimum Volatility SciBeta Eurozone Low-Volatility Maximum Deconcentration SciBeta Eurozone Value Maximum Deconcentration SciBeta Eurozone Growth Maximum Deconcentration SciBeta Eurozone High-Dividend-Yield Maximum Deconcentration SciBeta Developed High-Liquidity Maximum Decorrelation SciBeta Developed High-Liquidity Maximum Deconcentration SciBeta Developed High-Liquidity Diversified Risk Parity SciBeta Developed High-Liquidity Diversified Multi-Strategy SciBeta Developed High-Liquidity Maximum Sharpe Ratio SciBeta Developed High-Liquidity Minimum Volatility SciBeta Developed Low-Volatility Maximum Deconcentration SciBeta Developed Value Maximum Deconcentration SciBeta Developed Growth Maximum Deconcentration SciBeta Developed High-Dividend-Yield Maximum Deconcentration 15

16 16 Scientific Beta More Transparency,

17 A wide variety of equity strategies exists. These are systematic beta strategies but they differ from standard market cap-weighting in their construction method. New types of advanced beta indices and funds are launched with increased frequency, with providers reporting the outperformance of their approaches over standard indices. However, this information does not allow strategies to be compared on an unbiased and similar basis as they are often promoted by competing index providers. Scientific Beta, as a multi-strategy platform, allows investors to avail of a coherent and unbiased vision of the performances and risks of the main smart beta strategies and of their implementation through indices. The Smart Beta 2.0 approach promoted by ERI Scientific Beta, enables investors to have at their disposal a wide choice of indices according to the universe of stocks selected and to the risks to which they wish, or do not wish, to be exposed. Analytics More Analytics 17 This wealth of choice has led to the availability as of 15 April, 2013 of some 2,442 indices. Scientific Beta Analytics enable you to analyse the performance and risks of this wide range of indices. These analytics are composed not only of synthetic but also of advanced analyses. The functionalities enable the performance and risks to be measured in both absolute and relative terms and also allow the user to qualify the risk-adjusted performance, to know the geographic, style and sector exposures, and to understand the source of the performance (performance attribution). One of the advantages of investing in Smart Beta 2.0 is to be able to have access to indices that are exposed to very differentiated risk premium variations. Scientific Beta Analytics allow you to easily measure and compare such conditional performances, whether taking into account market returns or market volatility.

18 From April 15, 2013, ERI Scientific Beta will allow investors to access more than 30 flagship smart beta indices, corresponding to the main diversification strategies, with full transparency and at no cost. These indices, like the other 2,442 smart beta benchmarks that correspond to the choices of risks proposed to investors, and no longer imposed on them, are accessible on the first worldwide smart beta index platform: ERI Scientific Beta is a new EDHEC-Risk Institute venture managed by EDHEC Risk Institute Asia Ltd. Like all of EDHEC-Risk Institute s activities, ERI Scientific Beta s goal is to bring more academic rigour, more transparency, more choice, more risk control and more analytics at the lowest cost to the index industry. Set up in 2001, EDHEC-Risk Institute is one of the leading academic research institutions in the investment field. It brings together 90 full-time staff and 48 research associates and affiliate faculty. Its philosophy is to bridge the gap between academia and practitioners and to favour the adoption by the industry of academic research results. For more information on EDHEC-Risk Institute and EDHEC Risk Institute Asia Ltd, please visit

19

20 For more information, please contact: Séverine Anjubault on: or by to: ERI Scientific Beta HQ & Asia 1 George Street #07-02 Singapore Tel: headquarters@scientificbeta.com ERI Scientific Beta R&D 393 promenade des Anglais BP Nice Cedex 3 France Tel: research@scientificbeta.com ERI Scientific Beta Europe 10 Fleet Place, Ludgate London EC4M 7RB United Kingdom Tel: europe@scientificbeta.com ERI Scientific Beta North America 1230 Avenue of the Americas Rockefeller Center - 7th Floor New York City - NY USA Tel: northamerica@scientificbeta.com May 2013