Turn on Javascript in your browser settings to better experience this site.

Don't show this message again

This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. Find out more


Aberdeen’s approach

Add the power of active to the efficiency of passive with SMARTER Beta™ exclusively from Aberdeen. Managed by a highly experienced team and with ESG embedded in our approach, we target multiple factor premia, aiming to help you enhance return and reduce risk – reliably, robustly and responsibly.

Competitively priced bundled solutions for the benefit of sophisticated institutional and professional investors

Smart beta, a form of factor investing, has rapidly become a popular alternative to both traditional active and passive management and is now firmly recognised by investors as a third approach to investing.

At Aberdeen, our approach to smart beta is referred to as SMARTER Beta™ - an acrostic for the characteristics that makes it ‘smarter than beta’:

Systematic

Fully systematic investment solutions that efficiently harvest multiple risk premia factors and regularly rebalances to maintain targeted factor exposures;

Multifactor

Provides targeted exposure to multiple enhanced RIPE factors – Value, Quality, Momentum, Small Size, and Low Volatility – which benefits from low, and even negative, cross-sectional correlations across factors which drives diversification benefits and improves risk-adjusted returns;

Affordable

Competitively priced bundled solutions (i.e. our proprietary indices are only available to Aberdeen Asset Management and our investment strategies tracking these indices do not pay index licensing fees) for the benefit of sophisticated institutional and professional investors;

Resilient

Designed to be more intuitive and diversified than rival approaches in order to perform effectively in a variety of market conditions;

Transparent

Our proprietary indices are owned by Aberdeen Asset Management but independently calculated by a leading third party calculation agent/administrator;

ESG Inside

Our index universe excludes controversial companies (companies exposed to controversial weapons and those with ‘severe controversies’);

RIPE Factors

Our enhanced factors are Robust, Intuitive, Persistent, and Empirical.

Chapter 1

RIPE factors in focus

RIPE factors is an acrostic for the Robust, Intuitive, Persistent, and Empirical prerequisites for inclusion as a risk premia factor:

Robust

factors must perform effectively in a constantly changing environment;

Intuitive

factors should behave as one would expect e.g. a company with improving financial metrics such as increasing profit margins and asset turnover should, everything else being equal, perform better than a company with decreasing profit margins and asset turnover;

Persistent

factor returns will be cyclical but show persistence and generate excess returns over medium to long-term; and

Empirical

factors should be based on/supported by empirical academic research that explains a reasonable basis for the existence of a premium.

The RIPE factors are Value, Quality, Momentum, Small Size, and Low Volatility:

Examples of RIPE factors
Factor Premise Common constructions Our enhanced approach Rationale
Value

Stocks priced low (high) relative to fundamental measures of value outperform (underperform) so bias portfolio towards cheap stocks

Metrics based on P/B, P/E, D/P or composites of these and other fundamental value metrics

We use forward looking data which is particularly relevant in periods of changing markets and company financials

Reflects forward looking company valuations (ie when banks cut dividends this is reflected in our factor design)

Quality

Stocks of higher quality companies tend to outperform so bias portfolio towards stocks with a strong measure of quality

Metrics such as ROE, ROA, earnings stability, dividend growth stability, financial leverage

In addition to the common metrics used we also focus on capital expenditures and efficiency of capital utilised

By focusing on capital efficiency and improvements in quality metrics we aim to capture improvements rather than just levels

Momentum

Price trends tend to persist so bias portfolio towards stocks that have recently performed well

Metrics based on past returns (eg. 6 or 12 months, often excluding a recent period), sometimes normalised for volatility

We capture momentum not only at the stock level but also at an industry level. We also look at earnings momentum using forward estimates

Academic research has shown that momentum at the industry level persists and explains most of the excess returns

Small Size

Small companies tend to outperform larger ones so bias portfolio towards stocks with a smaller market capitalisation

Metrics based on market capitalisation (full or free float)

We capture the small size effect at the portfolio level. Doing so allows us to benefit from the correlations between stocks

Return enhancing due to (i) small company illiquidity and credit risk premia and (ii) the rebalancing effect of selling stocks that have risen in price

Low Volatility

Contrary to predictions of financial theory, less risky stocks tend to outperform risker ones so bias portfolio towards stocks with historically low absolute variability of returns

Metrics based on beta and realised volatility, eg standard deviation (one year, two years, three years), downside standard deviation, standard deviation of idiosyncratic returns, beta

We capture the low volatility effect at the portfolio level. Doing so allows us to benefit from the correlations between stocks

Capturing the effect at the fund level allows us to hold stocks with average volatility which might display other desirable characteristics

Chapter 2

ESG integration

It is important to note that we have deliberately excluded environmental, social, and governance (ESG) factors as a risk premium. This is not because we believe ESG to be unimportant; indeed, the opposite is true. As a responsible investor, we have fully integrated ESG into our systematic investment processes as we believe ESG helps promote competitive financial returns and positive environmental and societal impact. However, a sufficiently long history of ESG data is not available so it does not, for the time being, meet our prerequisite criteria for inclusion as a RIPE factor.

Nevertheless, we have fully integrated ESG within our SMARTER Beta™ equity approach since we believe ESG helps promote competitive financial returns and positive environmental and societal impact. Our ‘ESG Inside’ methodology excludes controversial companies, specifically those companies involved in the production of cluster bombs and munitions, landmines, depleted uranium weapons and armour, and chemical and biological weapons. We also exclude companies deemed to have severe controversies (the ‘worst of the worst’) from our investable universe, based on ratings by our ESG data partner, Sustainalytics.

Chapter 3

Spectrum of indices

Our investment strategies follow a broad range of SMARTER Beta™ equity indices*.

*It is not possible to purchase an index directly.
 

SMARTER Beta multifactor indices

Seven salient features of SMARTER Beta™ equity indices and funds

1) SMARTER Beta™ = Systematic, Multifactor, Affordable, Resilient, Transparent, ESG Inside, and RIPE Factors™
2) RIPE = Robust, Intuitive, Persistent, and Empirical (RIPE)
3) As per our volatility comparison and analytics with MSCI All Country World Index. Our approach makes use of a broader universe, has exposure to a greater number of outperforming risk premia, fully integrates ESG, is rebalanced more often to maintain targeted factor exposures (ie prevents factor decay), those rebalances are not advertised in advance to the wider market (so we cannot be front-run), and our final index is more concentrated in terms of security holdings vis-à-vis competing designs (which provides a higher active share relative to the market cap equivalent and other smart beta designs). Source: Aberdeen Asset Management and MSCI.
Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis, should not be taken as an indication or guarantee of any future performance analysis forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI” Parties) expressly disclaims all warranties (including without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages (www.msci.com).
4) ESG = Environmental, Social, and Governance
5) V&E = Voting and Engagement

Chapter 4

Why Aberdeen?

We are a full-service global asset manager with USD 374 billion in third party assets under management (as at 31 December 2016). We have a demonstrable track record of success in managing passive strategies since 2005, active quantitative strategies since 2007, and smart beta strategies since 2013.

Our investment process is grounded in academic research and well-proven investment theory.

Our experienced and stable team of 28 investment professionals has complementary skillsets located across offices in Edinburgh, London, and Shanghai. With $77 billion in assets under management across passive, smart beta, and active quantitative strategies (as at 31 December 2016), we benefit from significant economies of scale.

Aberdeen has also been a signatory to the Principles for Responsible Investment (PRI) since 2007, underlining our ESG credentials.

Aberdeen Quantitative Investments team

Formed in 2005, the team manages a diverse range of systematic products across the risk-return spectrum including passive, smart beta, and active quant strategies. Using proprietary, systematic (rules-based) approaches to investing, our team manages equity, fixed income, and derivative portfolios across all markets to provide clients with cost-effective, risk-controlled and transparent customised solutions.

Our investment process is grounded in academic research and well-proven investment theory. We identify sources of excess risk-adjusted returns, test them throughout the business cycle, and implement them in a systematic, cost-effective, and risk-controlled manner. By having a deep understanding of the individual sources of returns, we are well placed to optimally combine them to create solutions in line with our clients’ requirements, which could encompass pure index tracking, enhanced indexation, smart beta (SMARTER Beta™) or derivative overlays such as call options overwriting.

 

Image credits
Evannovostro / Shutterstock
MISCELLANEOUSTOCK / Alamy Stock Photo
all_is_magic / Shutterstock