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A smart approach of Index Management

Two years ago, Ossiam entered the European market with ETFs based on two innovative investment strategies offering an alternative to traditional equity market cap-weighted indices: The Ossiam Equal Weight ETFs and The Ossiam Minimum Variance ETFs. Back to smart beta concept at Ossiam…

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What is smart beta?

Smart or enhanced beta refers to passively managed strategies relying on alternatively weighted indices. While this concept was born and first implemented on the equity market, it is now spreading to other asset classes. The innovative approach of smart beta incorporates features such as diversification and risk management constraints, allowing investors to build durable portfolios.

The implementation of smart beta strategies has given birth to a whole family of new indices among which equally-weighted, factor-based and risk premia indices are the most widely represented.

What are the prospects for smart beta?

There has always been a strong appetite for passive investing, and for a long time, market capitalization weighted indices have been the natural choice. But over the course of the years, this weighting scheme has raised growing criticism amongst academics due to its inefficiencies and biases. The excessive volatility witnessed in equity indices over the last few years also played its role in convincing investors that more sophisticated weighting strategies were needed.

In its Pension Fund Allocation Survey 2012, bfinance reveals that one third of investors expect to devote over ten percent of their portfolio to alternative index investments before 2015, quoting risk reduction and outperformance relative to the market cap indices as the main reason. Even though the smart beta approach is still in its infancy, it has already attracted dozens of billions of dollars of investment in the past three years globally, giving a glimpse of its enormous potential for growth.

How do you implement the “smart beta” concept?

Ossiam, an expert in quantitative asset management

Ossiam’s added value lies in the development of non-discretionary management styles, based on quantitative and fundamental analysis and the availability of these management strategies through Collective Investment Schemes to meet the various allocation and risk management (...)

Efficient indexing is the core of our business model. We can embed this approach in a variety of investment vehicles, including ETFs. They are an easy way for investors to gain exposure to the smart beta delivered by our quantitative, algorithmic, rule-based indices. It also provides added benefits including liquidity, cost efficiency and transparency.

Last year, Ossiam entered the European market with ETFs based on two innovative investment strategies offering an alternative to traditional equity market cap-weighted indices. The Ossiam Equal Weight ETFs are based on Eurozone and broad European indices attributing the same weight to each of their constituents to avoid concentration effects and bias towards large companies. The Ossiam Minimum Variance ETFs are the first ETFs offering access to a diversified portfolio where securities are selected and weighted in such a way as to mitigate risk.

Could you give more details on the Ossiam Minimum Variance strategy?

The Minimum Variance strategy was designed to provide an investment benchmark for investing in equity markets with significantly reduced volatility, while monitoring portfolio liquidity and diversification.

The approach initiated by our Research and Investment Management team aims at creating an optimized selection of stocks which have low volatility and/or low correlation figures among a larger equity investment universe: the STOXX Europe 600, the S&P500, the FTSE 100 and the S&P IFCI for Emerging Markets.

While elaborating its minimum variance framework, Ossiam has been working closely with three leading index providers to embed its strategy into four indices: the iSTOXX™ Europe Minimum Variance NR index(Bloomberg: ISEMVT); the Ossiam US Minimum Variance NR index (bloomberg: OUMVNR); the FTSE 100 Minimum Variance TR index (Bloomberg: TUKXMV); the Ossiam Emerging Markets Minimum Variance NR index (Bloomberg: OEMMVNR) ; and the Ossiam World Minimum Variance Index NR (Bloomberg : OWMVNR).

A few parameters had to be adjusted to take into account the specificities of each of these universes. However, the approach itself remains consistent across the various indices. Furthermore, the results obtained from each investment universe are very comparable, showing the robustness of the approach: the volatility of these minimum variance indices is reduced on average by 30% [1] compared to their market-cap weighted benchmarks, also leading to a significant reduction of drawdowns.

Ossiam has built a robust minimum variance framework that can be extended to any other stock universe and which can be tailored to client specific needs through mandates and dedicated funds. Information on Ossiam’s solutions and ETF are available at www.ossiam.com

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Footnotes

[1] Based on a backtest. Past simulated volatility data is not a reliable indicator of future volatility.

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