Index Investing

Index Investing - Articles & White Papers

This section lists research on index investing, but white papers on "smart beta", rather than plain vanilla indexing, have been the standout hot topic in this category. Smart beta strategies seek to identify "risk factors" which can generate excess return, and then seek to build factor models which tilt a portfolio away from the index in order to harvest alpha. With risk strictly controlled, portfolio managers will thereby seek to build a better beta; sometimes referred to as "fundamental beta" depending on the risk factors selected. Indeed, the selection of risk factors is a key consideration, and reports setting out a framework for assessing factors and implementing smart beta strategies, or providing new metrics for evaluating the efficiency of smart beta indices have proved very popular. Among the key proponents of smart beta, Research Affiliates has written a number of well-received papers, while Edhec have authored a number of technical papers, using the term "scientific beta". Northern Trust are one company who contend that, rather than a "buy and hold" approach to risk factors, different factors should be preferred at different times. Old school papers on index investing appear less frequently, but papers making the case for index-fund investing or comparing active versus passive strategies are still well-read. Indeed research from Towers Watson offers the perspective that there are too many active managers, and passive investment management should be more prevalent.
  • EDHEC-Risk Institute

    Is Smart Beta just Monkey Business? Factor Exposures, Upside-Down Strategies and Rebalancing (EDHEC)

    The “Monkey portfolio” proposition is that smart beta strategies can be deployed naively, with the assurance that all such strategies will add value. EDHEC's research suggests otherwise, with many smart beta strategies having exposure to other factors. The authors warn that care is needed to avoid over-extrapolating the implications of a particular test ...

    • Professional
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  • MSCI

    Bridging the Gap: Adding Factors to Passive and Active Allocations (MSCI)

    • 04 May 2017
    • Company: MSCI

    Asset owners face a challenge in determining how the factor allocation fits into the overall equity program: How does the factor allocation relate to the existing roster of active managers? This paper uses a risk budgeting framework to investigate how active mandates and factor allocations can be combined. Risk budgeting connects the manager selection process with the factor ...

    • Professional
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  • CFA Institute

    Fundamentals of Efficient Factor Investing (FAJ, 2017)

    This paper appeared in CFA Institute's Financial Analysts Journal. Combining long-only-constrained factor subportfolios is generally not a mean–variance-efficient way to capture expected factor returns. For example, a combination of four fully invested factor subportfolios—low beta, small size, value, and momentum—captures less than half ...

    • Professional
    • Views: 1306
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  • EDHEC-Risk Institute

    Academic Lessons on Factor Investing (EDHEC, 2016)

    This paper analyses what academic research has to say on equity factors. Our objective is to understand which lessons we can learn from such research in terms of designing and evaluating factor indices. When analysing academic publications on equity factor investing, five important lessons emerge, which provide useful perspective on practical questions about factor indices. This ...

  • EDHEC-Risk Institute

    Robustness of Smart Beta Strategies (EDHEC)

    This EDHEC paper examines the importance of robustness for smart beta strategies, explaining how a strategy being "relatively robust" differs from "absolute robustness". The authors describe how the robustness of smart beta performance can be assessed and quantified, describing various approaches, which may be used to improve the robustness of smart beta ...

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    • Views: 1403
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  • BlackRock

    The Rise of Factor Investing: Adoption by Institutional Investors (BlackRock, 2016)

    This paper examines the increasing prominence of factors and factor investing in institutional portfolios. The paper is split into four parts: Introduction; The Factor Landscape; Capital Allocation and Investment Strategies; The Future of Factor Investing. The report is based on a survey of 200 institutional investors from around the world.

  • Research Affiliates

    A Framework for Assessing Factors and Implementing Smart Beta Strategies (2015)

    Published in the Journal of Index Investing, this article argues that the academic literature is littered with a "zoo" of apparently smart risk factors, which in practice will go unrewarded, being the result of spurious and unwarranted data-mining, The authors suggest a methodology whereby robust, investable, risk factors can be identified, which make intuitive sense and ...

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    • Views: 1393
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  • FTSE Russell

    Smart beta: 2017 global survey findings from asset owners (FTSE Russell, 2017)

    Now in its fourth year, FTSE Russell’s comprehensive survey of global asset owners focuses on key themes behind the adoption, evaluation and implementation of smart beta. Find out the primary motivations of asset owners from across all asset tiers and regions, and get insight into how they perceive and participate in growing trends such as smart sustainability and ...

  • S&P Dow Jones Indices

    The Carbon Scorecard (S&P Dow Jones Indices)

    There is a recommendation from the Financial Stability Board that asset managers now report on the carbon exposure in their portfolios to manage climate-related risks. This report assesses the carbon risks and opportunities of major global equity indices. A range of metrics reveals the carbon footprint of each index, alongside exposure to fossil fuels, stranded assets, and ...

  • Legal & General Investment Management

    The Rise of Factor-Based Investing (LGIM)

    Factor-based investing, which seeks to identify the underlying characteristics that drive performance, has grown rapidly since the financial crisis. This is because investors are looking to go beyond asset class labels and understand the true drivers of risk and return in their portfolios.

  • EDHEC-Risk Institute

    The Case for Multi-Beta Multi-Strategy High Factor Exposure Indices (EDHEC, 2017)

    This paper introduces Scientific Beta's well-diversified "top-down" multi factor approaches and compares them with "bottom-up" score-weighting approaches that target high factor intensity. We find that focusing solely on increasing factor intensity leads to inefficiency in capturing factor premia, as exposure to unrewarded risks more than offsets the ...

  • Robeco

    Low Volatility in historical perspective: Fund investing since 1774 (Robeco)

    As portfolio managers of Robeco Conservative Equities, we want to place our role into a historical perspective and learn from the history of financial markets, and mutual funds in particular. History teaches us that good ideas do not necessarily guarantee successful funds. Timing is everything. Still, capital protection, high income and low turnover are timeless factors that are ...

  • S&P Dow Jones Indices

    Why Does the S&P 500 Matter to the UK? (S&P Dow Jones Indices, Sep 2016)

    This paper examines the S&P 500 from the perspective of a UK-based investor. We examine the concentration and sectoral makeup of the U.K. equity market, and the motivations for British market participants to diversify internationally; the role of the UK and the U.S. in the global economy and global equity markets; potentially complementary aspects of an S&P 500-linked ...

  • S&P Dow Jones Indices

    Blending Factors in Your Smart Beta Portfolio (S&P Dow Jones Indices, 2016)

    In recent years, smart beta strategies have seen a significant increase in popularity. These strategies seek to measure systematic factors and aim to harvest the associated long-term risk premium. While many empirical studies show that smart beta strategies have historically outperformed their cap-weighted benchmarks, there is less evidence to suggest that any one factor will ...

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