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Industry Analysis

Since 2006, EDHEC-Risk Institute has annually surveyed European professional investors about their views and uses of ETFs, and more recently about their use of smart beta and factor investing strategies, as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies”. In this 13th edition of the survey, we felt it was time to add a focus on SRI (Socially Responsible Investing)/ESG (Environmental, Social, Governance) investing, both in the context of ETFs and smart beta and factor investing strategies.

A number of empirical studies, mainly from academic researchers, have been crucial in the debate on the economic role of futures trading.  This article briefly reviews these influential studies with a focus on agricultural futures contracts, financial futures contracts. and the transparency of data.Economic Role of Futures Trading   By Hilary Till, Research Associate, EDHEC-Risk Institute; and Principal, Premia Research LLC  

In this month's interview, we speak to Albert de Wet from FirstRand Group Treasury about the creation by FirstRand and EDHEC-Risk Institute of a research chair on the design and implementation of welfare-improving investment solutions for institutions and individuals. Albert de Wet also discusses the role of research in FirstRand's overall business strategy, the changes and challenges in the domain of investment management and the position of FirstRand in the current environment. He finally explains why they have decided to partner with EDHEC-Risk Institute on this research chair.

Investment practices in institutional asset management have been profoundly impacted by the rise of two new paradigms: factor investing and liability-driven investing. Interestingly, both of these approaches have conceptual justifications in financial theory, an encouraging sign that the famous “gap between theory and practice” is not as wide as it once appeared.

It has been argued that portfolio rebalancing, defined as the simple act of resetting portfolio weights back to the original weights, can be a source of additional performance. This additional performance is known as the rebalancing premium, also sometimes referred as the volatility pumping effect or diversification bonus since volatility and diversification turn out to be key components of the rebalancing premium.

We introduce a method to create two interpretable liquidity measures, which we associate with market and funding liquidity. The construction is based on creating two parsimonious linear combinations of the many liquidity proxies often used in the liquidity literature, both displaying mean-reverting behaviour, but characterized by very different reversion speeds.

In this month's interview, Frédéric Samama, Head of Responsible Investment at Amundi, discusses the evolution of responsible investing in the approaches adopted by institutional investors and reflects on the most effective ways for investors to enhance the materiality of investment decisions. He also tells us how to move towards more universally accepted norms for ESG reporting and explains how EDHEC-Risk Institute’s research can help the industry to cope with these challenges.

  Thoughts and Afterthoughts on the EDHEC Climate Change Finance Conference Gianfranco Gianfrate, Professor of Finance, EDHEC Business School, and Sustainable Finance Lead Expert, EDHEC-Risk Institute.  

Pricing Media-Derived Carbon Emission Betas   Gideon Ozik, EDHEC Business School Ronnie Sadka, Boston College     Abstract

  2019 was another record year for the European ETF industry, with total assets under management topping 6.3 trillion dollars. Since 2006, the renowned EDHEC-Risk European ETF and Smart Beta Survey has witnessed the evolution of European investors' ETF practices and continued to provide insight into the latest trends.

  Industry Analysis   Scientific Beta Low Carbon Option Supporting the transition to a low carbon economy and protecting multi-factor indices against transition risks   Frédéric Ducoulombier, ESG Director, Scientific Beta

Feature     Climate Change Finance: The Big Picture  

  Resolution of Uncertainty - Comments on yesterday FED's meeting Riccardo Rebonato, Professor of Finance, EDHEC-Risk Institute, EDHEC Business School  

Feature     A Financially Justifiable and Practical Implementable Approach to Coherent Stress Testing  

In this month's interview, Caroline Prévost discusses the newly launched specialization Investment Management with Python and Machine Learning. She explains why EDHEC-Risk decided to partner with Coursera to develop this online programme and why they chose to explore asset management through the prism of machine learning. She provides further details of the 4 MOOCs delivered and tells us how these online courses fit into ERI's Executive Education offering.

  Insights from the 12th EDHEC European ETF, Smart Beta and Factor Investing Survey Véronique Le Sourd, Senior Research Engineer, EDHEC-Risk Institute      

Industry Analysis   Machine Learning for Investment Decisions: A Brief Guided Tour Professor John M. Mulvey, Bendheim Center for Finance, Center for Statistics and Machine Learning, Princeton University  

Feature     Factor Investing in Sovereign Bond Markets: A Time-Series Perspective    

Educating students in finance who will have a positive impact on the world and society" - an interview with Laurent Deville

  Sustainable Investing – How Finance Can Help Address the Tragedy of the Horizon Lionel Martellini      

We strongly believe that creating a common language for all actors in the financial system will be helpful in promoting private sector’s contribution to long-term sustainable growth. This paper is an attempt to contribute to this effort by providing clarification and taxonomy with a focus on an investment process perspective. Similar to common practice in investment management, the paper initiates the discussion on the commitment to earning social and environmental returns by drawing on the key distinction between objectives and constraints. The paper then divides into two main sections to discuss the selection process and the allocation process. We hope our paper will provide useful clarification to asset managers and asset owners seeking to promote sustainable investing practices.

Riccardo Rebonato, Professor of Finance, EDHEC-Risk Institute, EDHEC Business School is specialist in interest rate risk modelling with applications to bond portfolio management and fixed-income derivatives pricing. He comments on yesterday FOMC & FED's meeting. The equity markets heaved a sigh of relief after Chairman Powell’s words at the post-FOMC meeting conference, interpreting his remarks as an implicit assurance that (if needed) the policy of the Greenspan / Bernanke / Yellen ‘put’ will be continued under his stewardship. Matters are not quite as straightforward, however, for two important reasons.

Industry Analysis   Second thoughts about adaptive markets David Stevenson, Research Associate, EDHEC-Risk, Chairman, ETF Stream and Columnist for the Financial Times (the Adventurous Investor), Investment Week and Money Week  

  EDHEC-Risk on Factor Investing in Sovereign Bond Universes Jean-Michel Maeso      

Industry Analysis   Peak Smart Beta David Stevenson, Research Associate, EDHEC-Risk, Chairman, ETF Stream and Columnist for the Financial Times (the Adventurous Investor), Investment Week and Money Week  

  Why Is the Market Not Believing the Fed? Riccardo Rebonato, Professor of Finance, EDHEC-Risk Institute, EDHEC Business School  

Industry Analysis   Introducing "Flexicure" Retirement Solutions Lionel Martellini, Professor of Finance, EDHEC Business School, Director, EDHEC-Risk Institute Vincent Milhau, , Research Director, EDHEC-Risk Institute   A major crisis is threatening the sustainability of pension systems across the globe

Industry Analysis   Main results from the EDHEC European ETF and Smart Beta and Factor Investing Survey 2018 Véronique Le Sourd, Senior Research Engineer, EDHEC-Risk Institute  

In this interview, we talk to Jaap van Dam, Principal Director of Investment Strategy at PGGM and Member of the EDHEC-Risk Institute Institutional Advisory Board, Kees Koedijk, Dean of TIAS Business School and Alfred Slager, Professor of Pension Fund Management at TIAS Business School and Trustee at SPH, the Dutch pension fund for General Practitioners, about the release of their new book: “ACHIEVING INVESTMENT EXCELLENCE - A Practical Guide for Trustees of Pension Funds, Endowments and Foundations”.

Feature     Do Financial Mistakes by Households Matter for Society? Harjoat S. BhamraRaman Uppal  

  The December ‘dot plot’: even lower future yields than meets the eye Riccardo Rebonato, Professor of Finance, EDHEC-Risk Institute      

  Advances in Financial Technologies and Applications to Investment Solutions for Individuals Maud Gauchon      

Feature     Factor-Based Commodity Investing  

  "Academic research is crucial to appraise the potential of real estate as one of the key drivers of multi-asset investment solutions"   

In the Autumn 2018 Scientific Beta special issue of the Research for Institutional Money Management supplement to Pensions & Investments, we first show that achieving robust exposure to long-term rewarded factors, good diversification of unrewarded risks, and high levels of investability are key requirements for adding value with factor indices. It is clear that this added value is expressed over the long term, but that risk control options can increase the short-term consistency of the outperformance that investors expect.

Industry Analysis   Wheat Futures Contracts: Liquidity, Spreading Opportunities, and Fundamental Factors By Hilary Till Research Associate, EDHEC-Risk Institute; and Principal, Premia Research LLC  

In this month's interview, John Mulvey, Professor of Operations Research and Financial Engineering (ORFE) Department at Princeton University, Anil Suri, Managing Director and Head of Portfolio Analytics & the Innovation Development Center at Merrill Lynch Wealth Management and Lionel Martellini, Professor of Finance at EDHEC Business School and Director of EDHEC-Risk Institute, discuss the newly-launched EDHEC-Princeton goa

  Individuals need flexicurity in retirement solutions Vincent Milhau Uncertain perspectives for the first two pillars of pension systems

Industry Analysis   Applying Goal-Based Investing to the Retirement Issue Lionel Martellini Vincent Milhau John Mulvey    

Industry Analysis   Individual Investment Processes for the 21st Century Arjuna Sittampalam, Editor, IMR Magazine    

Industry Analysis   A Portfolio Perspective on the Multitude of Firm Characteristics Victor DeMiguel Alberto Martin-Utrera Francisco J. Nogales Raman Uppal  

Industry Analysis   Retirement Goal-Based Investing Kevin GironLionel Martellini The need for new retirement solutions

Industry Analysis   Multi-Asset Products and Solutions Vincent Milhau  

Industry Analysis Goal-Based Investing and its Application to the Retirement Problem Lionel Martellini Vincent Milhau John Mulvey

In this month’s interview, Laurent Trottier, Global Head of ETF, Indexing & Smart Beta Management, Amundi, comments on the growth of Factor Investing in an institutional context. He tells us about the demand for Smart Beta strategies in equity and also bond markets, and shares his views on the main challenges for asset managers involved in Smart Beta and Factor Investing.    

  Smart Beta and Beyond: Maximising the Benefits of Factor Investing Lionel Martellini Vincent Milhau   Full publication, supported by Amundi ETF, Indexing and Smart Beta, is available here.  

  EDHEC-Risk on Factor Investing for a More Efficient Harvesting of Risk Premia Across and Within Asset Classes Lionel Martellini

Individual Investment Solutions And Other Research - IMR Special Edition Autumn 2017 Arjuna Sittampalam

In this month’s interview, Jean-Louis Laurens, French Asset Management Association (AFG) international ambassador, discusses the recent launch of a partnership at EDHEC-Risk Institute supported by AFG on risk management as a source of performance, as well as the main challenges and perspectives for the French asset management industry and for AFG for the future.  

In the April 2017 issue of the Research for Institutional Money Management supplement to Pensions & Investments, the first article explores a novel approach to address the challenge raised by the standard investment practice of treating attributes as factors, with respect to how to perform a consistent risk and performance analysis for equity portfolios across multiple dimensions that incorporate micro attributes. Our study suggests a meaningful new dynamic approach, which consists of treating attributes of stocks as instrumental variables to estimate betas with respect to risk factors for explaining notably the cross-section of expected returns.

In this article, the problems with equity factor methodologies used by some providers, when they depart from academically accepted practices, are analysed. These include the same provider using different definitions of the value factor at various times. Excessively concentrated bets without adequate diversification are also identified. 

The concepts of factor investing and smart beta are much less developed in bonds compared to equites. In the identification of factors, various difficulties arise. Existing bond indices have serious deficiencies which are partly related to factor exposures being unstable. A broad overview of current first generation smart beta approaches also highlights various weaknesses.

Academic research has come up with a remarkable result of considerable interest to pension funds, using liability-driven approaches. Modern Portfolio Theory advocates that pension plans should invest in two portfolios, a liability-hedging portfolio consisting of fixed income securities and a performanceseeking portfolio exposed to riskier assets. However, the finding is that selecting certain types of equity in the risky portfolio can not only enhance the liability hedging benefits, but can also increase the overall performance. Alternatively, a higher allocation to equities becomes possible with commensurate extra performance with the same liability hedging benefits.

Predicting Risk Premia for Treasury Bonds: The ERI Risk Premium Monitor by Riccardo Rebonato, professor of Finance, EDHEC Business School Investors in the Treasury market often observe an upward-sloping yield curve. This means that, by assuming ‘duration risk’, they can very often invest at a higher yield than their funding cost. Yet, if the steepness of the yield curve purely reflected expectations of future rising rates, no money could on average be made from this strategy. This prompts the obvious question: When does the steepness of the yield curve simply reflect expectations of rising rates, and when does it embed a substantial risk premium?