Much more than a ranking, a leading institution
Standing up to the rankings is a noble cause, and EDHEC Business School knew it would need more than words to do so. So the business school rolled up its collective sleeves and, in 2001, founded the research centre EDHEC Risk Institute (aka ERI). ERI is targeted research, with EDHEC wisely choosing to focus its efforts on a subject it knew it could impact: asset and risk management.
Since 2001 EDHEC’s big idea has been that true impact is more than the sum of clicks on its scholarly articles. Impact must also be measured by the effects of EDHEC research on business, and the effectiveness of its graduates in professional spheres. Fast forward fifteen years. Many top firms in financial centres worldwide now know and use EDHEC’s research. This is why EDHEC is able to place graduates in these firms, and why employers in the City of London, for example, rank EDHEC students ahead of those from HEC. This strategy culminated in the Risk Institute’s spinoff, Scientific Beta. With a mere 45 employees based in five offices worldwide (Singapore, Tokyo, Nice, London and Boston), the firm delivers smart beta indices to leaders in the investment industry in three time zones. Founded in 2012 in a bold move to bring research results to business and to market, Scientific Beta’s tools are now used to manage over 25 billion dollars, up 56% between June 30 and December 31, 2017.
From the Ivory Tower to the City
Moving out of the ivy-covered walls of a business school’s research centre to earn a place in the high-stakes hustle of international asset management has not been easy. Academic research takes time to conduct. Discussion with colleagues can lead to revised findings or reformulated research questions, taking researchers right back to the drawing board.
"By contrast, when it comes to producing 8,000 indices a day, six days a week, time is of the essence. Meeting deadlines is important, and there is no room for error", explained Professor Noël Amenc, CEO of ERI Scientific Beta, in an interview. “Once produced, the indices cannot easily be corrected without their track record being discredited.” As if that were not a stiff enough dose of reality, ERI Scientific Beta has to provide this service while complying with the complex regulatory, legal and fiscal environments in place wherever their clients operate.
Another challenge Scientific Beta has been able to surmount is implementing an effective marketing strategy with few resources. The firm has been successful in driving recognition of the Scientific Beta brand in an industry where a brand is crucial. Scientific Beta is recognized today as a first-rate player in smart beta not because of its size, or even its revenues, but because of the quality of its research. This quality of the research is the core element in the promotion of the Scientific Beta indices, whether it involves professional conferences, which Scientific Beta organizes not only in Europe but also in North America, or setting up webinars and a YouTube channel dedicated to smart beta.
Performance is key
Operations are important, but nothing matters if there isn’t performance. Scientific Beta has risen to the challenge of delivering results that perform in real markets. Their flagship index, the Multi-Beta Multi-Strategy Six Factor Equal Weighted Index, outperformed the S&P 500 by 3.55% from 1972 to 2015.
In January 2017, Financial Investigator reported that ERI Scientific Beta multi-factor indices posted “an impressive three-year live track record,” citing average annualized performance 2.13% stronger than cap-weighted counterparts over the first three-year live period. Again, innovative research means the firm can compete with giants like MSCI with its 3000-member staff. Since they were launched in 2013, the Scientific Beta Multi-Beta Multi- Strategy indices have outperformed the market on average by 2.06% annually. The research depth developed by ERI from its beginnings in 2001 to the founding of Scientific Beta in 2012 is paying off in other ways. The firm is viable, visible, and respected in the industry.
James Davis, CIO of OPTrust, a prominent Canadian pension fund, said, “we worked closely with the ERI Scientific Beta team to evaluate different smart beta strategies that align with our investment objectives,” adding: “The Multi-Beta, Multi-Strategy solution we chose [means] we can be more comfortable with our overall equity exposure.” Business partners, many of whom offer co-branded funds with Scientific Beta, include Morgan Stanley, Amundi, Global X, Nomura, and more recently Legal & General. Co-branded Scientific Beta funds are listed on the New York, London, Paris, Milan and Frankfurt stock exchanges. “ERI Scientific Beta aims to be the first provider of a smart beta indices platform to help investors understand and invest in advanced beta equity strategies,” reported Global Initiative for Sustainability Ratings (GISR).
Scientific Beta innovates in pricing too: #makingfinanceusefulagain
In June 2016 a headline in CIO Magazine asked “how much should smart Beta cost?”, referring to Scientific Beta’s announcement that it was doing away with fixed fees and would only charge for performance. Performance in the case of an investment index really means outperformance, and Scientific Beta from now on bills its users strictly on the basis of how much better their indices do than the market average. Some question whether performance-fee-only is a workable business model for investment services, but Noël Amenc is more confident than ever: “The system of no longer paying for financial products according to... their supposed sophistication, but according to what they deliver, is a revolution that needs to occur,” noted the CEO.
Good firms are good citizens
Beyond confidence in research and confidence in performance, Scientific Beta is also confident that it can be more than a smart player. It can also be a good citizen. Scientific Beta has a growing reputation as a leader in Socially Responsible Investing (SRI). In September 2016 it signed the UNsupported Principles for Responsible Investment. Noël Amenc noted that the low carbon and SRI-screened indices produced by ERI Scientific Beta actually offer access to outperformance while enabling the carbon footprint of the investment to be reduced substantially. Scientific Beta aims “to participate in an increase in the level of welfare in society,” Noël Amenc commented. In 2016 one of the most prominent pension schemes in Europe, ERAFP, announced a major European institutional equity mandate would be benchmarked to Scientific Beta’s low carbon index.
Scientific Beta is clearly not resting on its laurels, or on its smart Beta smarts. Looking ahead, the firm sees strong potential for using its business methods as a model for joint infrastructure for other initiatives. Scientific Beta may inspire other benchmark production projects, such as those drawn from the research done by EDHEC infra, an initiative supported by the Monetary Authorities of Singapore, the World Bank, the G20 and large international financial institutions to study and model risks. Excellent research, top performance, pricing innovations, social responsibility, and focus on the end-user... a recipe for start-up success, and Scientific Beta’s success reflects brilliantly back onto the EDHEC Risk Institute. In turn EDHEC climbs the rankings. And it does so the old-fashioned way, through proven results and hard-earned renown. At a time when all business schools affirm that their research is excellent and influences business practices, EDHEC, with Scientific Beta, recalls that management sciences are above all applied sciences, and that the best way to determine what financial research is worth is to find out what the market is prepared to pay for it!
It takes some guts to stand up to the powerful citation indices and other Shanghai-style quick-fix university rankings, but EDHEC has been doing exactly that... for fifteen years. Here’s how a French business school becomes an international academic research force, and then, with the creation of a Risk Institute and its spinoff Scientific Beta, takes it up a notch, drawing on the experience of an up-and-coming player in the global market for investment indices.
This article was first published in #4 issue of Otherwise, the EDHEC magazine which focuses on international businesses and the global economy as seen by a French business school. If you enjoyed reading it, please subscribe to Otherwise here and receive it for free!