Smart beta provider aims to disrupt industry with new fee structure

Scientific Beta, the smart beta index provider that has come out of academic work done by Edhec Risk Institute, has launched an aggressive challenge to the sector by announcing that it will offer investors the option of paying fixed fees or fees based on the performance of its indices.

Introducing the new model, Noël Amenc, CEO of ERI Scientific Beta said it came in response to a number of failures that it sees in the tradional approach to charging that is being pursued by other index providers in the market.

Although it may be the case that fees have continued to fall because of competition across the industry, they are not necessarily benefitting the end investors because of the nature of performance variations that are possible from smart beta – because of the different methodologies used to develop the indices.

Thus, while shopping for smart beta indices may be ongoing very much on price, this fails to address what Amenc identified as the “true cost” to investors, which he argued was the performance differentials seen betweeen similar smart beta strategies offered by different providers on the basis of different underlying indices and their methodologies.

The second generation of smart beta has more robust in terms of the academic work that supports it, but equally, investors need to understand that it is not just about replication costs, but also about the robustness of methodologies.

“You can be smart and wrong. So there is a risk of underperformance.”

And the lack of transparency when it comes to publishing methodologies behind smart beta strategies is also harming end investors.,Amenc suggested.  The arguments from other competitors about the need to protect intellectual property within methodologies was weak: if they were concerned about their IP rights, then they should approach a patent office, he said, rather than try to make it difficult for others to gain full access to methodologies. As part of the Edhec organsiation, he said that all the methodologies, and a full explanation for how the fixed versus variable fees structure being proposed would be publicly available via the internet.

The Edhec Risk Institute Scientific Beta business must be run on a non-profit basis because of its academic status.

By proposing the new fee structure, however, Amenc said that he was confident the business would grow. Currently it claims some $10bn in assets under replication for the smart beta indices, gathered in the past three years.

Amenc said he did not expect competing providers of smart beta indices to follow Scientific Beta in adopting their own amended fee structures – to the extent that they may lobby regulators to block the approach – but if the model survives then it could significantly alter the industry landscape, he argued.


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