Opalesque Industry Update - As of April 22, 2013, EDHEC-Risk Institute has inaugurated its new smart beta index design and production activity, ERI Scientific Beta.|
This activity aims to revolutionise the index world through, firstly, a new approach to smart beta investing called Smart Beta 2.0, which enables investors to choose and control the risks of these new benchmarks, and secondly, total transparency on the methodologies and compositions of the indices available on the platform.
Through its ‘More for Less’ initiative, ERI Scientific Beta intends to promote a more transparent and efficient index market for the benefit of investors.
As such, ERI Scientific Beta is taking initiatives that are at odds with those of traditional index providers, by supplying information on its flagship smart beta indices free of charge, allowing investors to choose and control the risks of their smart beta investment, and, finally, by not asking institutional investors for fees on assets under management (AUM) to replicate its indices.
Tomas Franzén, Chief Investment Strategist of Andra AP-fonden (AP2) and Chairman of EDHEC-Risk Institute’s International Advisory Board, said, “The Scientific Beta initiative is a major mover of the whole concept of using more appropriate equity indices, or rather better constructed equity portfolios. It is important to better understand the dynamics of different alternative weightings and, at least, to be better prepared for market episodes when market-cap indices actually outperform. This initiative also is a very good example of the general need for solutions rather than products in investing.”
Professor Noël Amenc, Director of EDHEC-Risk Institute and CEO of ERI Scientific Beta, said, “There is dual motivation behind the Scientific Beta initiative: to encourage a more transparent index market and to allow investors to better manage the risks of their investment in smart beta benchmarks.”
1. A first for an academic institution
With ERI Scientific Beta, EDHEC-Risk Institute is positioning itself as the leading alternative index provider from the academic world. This academic affiliation is synonymous with scientific rigour, transparency and the capacity to integrate research developments in the area of benchmark construction without any particular commercial bias.
As such, ERI Scientific Beta is not the promoter of a particular proprietary technology, but a smart beta platform that is open to all innovations, with methodologies that are fully-documented and freely replicable.
2. Free flagship indices
3. Smart Beta 2.0 risk management
4. A new business model in the index industry
Up until now, index providers combined two different sources of revenue, and therefore of value creation. The first relates to the design and maintenance of indices. The second relates to the use of the brand name by asset managers, who sell investment products that track very well-known, popular indices. It seems curious that asset owners, or even asset managers, who do not use the brand name and just want to use the indices proposed as a reference to manage their assets, should have to pay these fees on AUM.
In this spirit, and given that the calculation and provision of data on benchmarks correspond to fixed costs, ERI Scientific Beta sees no reason to charge for the use of these services with fees on AUM.
By avoiding the sales and marketing costs to sell costly replication services based on fees on AUM, ERI Scientific Beta is part of a new, low cost business model which it thinks is attractive for the investment industry. It involves distributing high value-added indices and services through the web at a cost that corresponds to their production charges.
Moreover, while it is not abnormal for the possibility of replicating the indices for investment purposes to involve fees, the development of this commercial activity should not prevent investors, managers, and more globally all the stakeholders in the index market, from being able to check the reliability of the track records highlighted by the index promoters. In the area of smart beta, which involves innovative, and often more complex, forms of benchmarks, which have been created recently and are therefore often offered to investors with simulated track records, this transparency is indispensable for investor due diligence, and more globally to the market in order to appreciate the robustness of the performance of these new references. This is why ERI Scientific Beta is making all the information on its flagship smart beta indices available at no cost.
The revenues from ERI Scientific Beta's smart beta platform (www.scientificbeta.com) correspond to the provision of advanced analytics enabling the investor to carry out in-depth analysis of the risks and performances of smart beta indices. These analytics are unique on the market because they are dynamic and allow investors to test the quality and robustness of the benchmark they choose before any decision on the choice of weighting scheme or risk factors is made.
ERI Scientific Beta also offers very sophisticated risk management functions for smart beta indices, whether it involves absolute or relative risks. Scientific Beta offers investors the possibility to construct their own benchmark online by taking account of the various risk selection and control criteria offered by the platform. This functionality is part of the Smart Beta 2.0 approach to genuine risk management for smart beta promoted by EDHEC-Risk Institute. Ultimately, the Smart Beta 2.0 approach available since April 22, 2013, will provide investors with a choice of 2,442 customised indices.
This broad choice, which ERI Scientific Beta will extend again in the next 18 months to reach more than 6,000 indices, representing all the risk choices and strategies that can be envisaged in the area of smart beta, makes the platform the largest source of alternative benchmarks worldwide.
As a part of a not-for-profit organisation, ERI Scientific Beta will ask for a reasonable fee of €10,000 (13,500 USD) per year, beyond the free flagship indices, for the possibility of customising a benchmark according to the risks chosen by the Smart Beta 2.0 investor, and for access to advanced analytics that will enable investors to carry out in-depth analysis of the risks of smart beta indices and of the consequences of their choice of benchmark customisation on the performance and risk of the benchmark.
This high-quality/low cost positioning resulting in ERI Scientific Beta's "More for Less" baseline will also break with the practice of traditional index providers, who wish to protect their business by making sure that their methodology cannot be freely replicated, either by patenting it or by hiding certain details. For ERI Scientific Beta, the best way to protect its business is not by being secretive but through the quality of its service and its low cost.
5. A considerable investment for strong ambitions
ERI Scientific Beta’s presence is worldwide, with an R&D centre in Nice that works in synergy with the EDHEC-Risk Institute research teams that are already present on EDHEC's Nice campus, a presence in Singapore, where the 24-hour client services are managed, and an advisory presence around the platform in Tokyo, Boston, New York and London.
This investment is part of a very clear strategy on the part of EDHEC-Risk Institute to pursue its development as the leading centre worldwide for transferring knowledge drawn from research to the investment industry.
This desire is leading EDHEC-Risk Institute to shake things up in the area of indexation and make sure that the smart beta index market becomes more transparent, that the risks of the strategies are better documented, and that investments are made in the best cost conditions. Within five years, ERI Scientific Beta is aiming to be the leading alternative index provider capable of serving the worldwide investment community with smart beta indices in the best transparency, choice and cost conditions.
6. More information
To view the ERI Scientific Beta corporate film, please click here: front.edhec-risk.com/ScientificBeta/