Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Pandemic, trade indices stretch beta concepts
Scientific Beta, the former offshoot of the French international business school EDHEC, was acquired by the Singapore Exchange (SGX) in January 2020. The new owners have hastened the development of commercial funds management products and services, especially in the organisation’s core areas of ESG and factor research. They have also implemented a stronger Asian business focus.
The 93-per-cent owned SGX subsidiary, which maintains a close alliance with its now minority EDHEC-affiliated Risk Institute partner, this week (June 8 AET) announced the launch of two indices designed to track stocks which perform relatively well in periods of trade tension and pandemics.
The trade tension index incorporates trade war and trade peace indices which react positively to negative shocks from geopolitical events such as tariff news. Similarly, the pandemic index incorporates resilient and vulnerable stock indices from pandemic consequences such as social distancing measures.
Scientific Beta has long boasted of the robust nature of its ESG indices which followed the launch of ERI Scientific Beta in 2012. However, the shorter the life of any trend or theme that an index attempts to cover, the more difficult it is to conceptualise the groups of stocks affected as ‘beta’.
As to whether the trends or themes are ‘factors’ can be a similarly circular discussion. A lot of quantitative fund managers believe that such indices are sub-sets of the major factors of ‘value’, ‘quality’ and ‘momentum’ – leaving plenty of room for active manager skill, or alpha.
EDHEC-Risk Institute (ERI) was launched in France in 2001 in the middle of the technology/dot-com stock collapse. A Singapore campus for the business school was opened in 2011.
Noel Amenc (photo above), Scientific Beta’s chief executive and founder, said the new indices were like all of the firm’s indices, “based on academic research, notably on teleworkability and firm-level exposure to pandemic diseases for the pandemic indices and the tradability of goods and risks relating to trade policy in the case of the trade tensions indices”.
He said: “The distinguishing feature of Scientific Beta’s thematic indices is their robustness. The indices are robust to the conditions in which they are designed to operate, rather than being produced through in-sample optimisation, like many of our competitors’ products.”
Amenc is a professor of finance at EDHEC and also an associate dean for business development. He was instrumental in the 2020 sale to SGX for €186 million (A$275 million).
David Wickham, the firm’s global sales director and deputy chief executive, said the new suite of indices was part of the core-satellite approach – distinct from core benchmarks – and therefore represented “tactical deviations” from an institutional investor’s strategic allocations.
