ERI Scientific Beta has announced the launch of a series of new multifactor smart beta indices. The Multi-Beta Diversified High Factor Exposure series uses a top-down approach to maximise explicit risk control and diversification while taking interactions between factors into account. The methodology uses a High-Factor-Exposure filter which eliminates stocks that have exposures to factors other than the desired factor. The indices may serve as the underlying for future investment products such as ETFs.

Noël Amenc, CEO of ERI Scientific Beta.

“With the Scientific Beta Multi-Beta Diversified High Factor Exposure indices we show that it is not necessary 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,” said Professor Noel Amenc, CEO of ERI Scientific Beta.

Scientific Beta offers two series of indices based on its Multi-Factor Diversified High-Factor-Exposure methodology. The Multi-Beta Multi-Strategy Diversified High-Factor-Exposure Equal-Weight (EW) index series is available in a choice of four factors (value, size, momentum and low volatility), six factors (value, size, momentum, low volatility, profitability and investment) or quality (profitability and investment), and represent an equal weight allocation to Diversified Multi-Strategy High-Factor-Exposure single factor exposures. The Multi-Beta Multi-Strategy Diversified Max Factor Exposure index series uses a dynamic allocation to maximise exposure to six smart beta factors.

Between 1975-2015, the Multi-Beta Multi-Strategy Diversified High-Factor-Exposure Six-Factor EW index returned 3.7% above the market-cap equivalent with an improvement in Sharpe ratio from 0.36 to 0.71. Sector-neutral and country-neutral versions, as well as hedged versions in major international currencies (USD, EUR, GBP, JPY), are also available.

“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,” added Amenc.

Scientific Beta have already licensed several indices to ETF providers. The Global Equity Multi Smart Allocation Scientific Beta UCITS ETF (Euronext: SMRT)  is offered by Amundi ETF, and the MS Scientific Beta Global Equity Factors UCITS ETF (LON: GEF) is offered by Morgan Stanley.