ERI Scientific Beta criticises Mercer factor investing report

ERI Scientific Beta has strongly criticised a November 2017 Mercer report on factor investing, calling it an “all-out attack against evidence-based investment”.

The consultancy’s report was “representative of undocumented opinions” and therefore liable to misinform investors, according to the smart beta indices and analytics provider.

In a paper setting out their criticism in detail, Frédéric Ducoulombier, corporate director of ERI Scientific Beta, and Noël Amenc, its CEO, said: “It turns out that Mercer’s investment beliefs align nicely with their bottom line but not so much with the bottom lines of end-investors.”

According to ERI Scientific Beta, the consultant’s report had correctly underlined the potential for smart beta and factor strategies to add value, and the need for proper due diligence on these strategies.

But, it said, Mercer then recommended discretionary solutions “by argument of authority or by peddling (debunked) clichés on systematic strategies”.

In its report the consultant argued: “For a relatively small increase in fee level, active multi-factor approaches offer superior risk management and portfolio evolution over time.”

“There is ultimately no empirical evidence supporting Mercer’s allegations against factor investing, hence they are just unfounded assertions.” 

Noël Amenc and Frédéric Ducoulombier, ERI Scientific Beta

A spokesman for Mercer told IPE: “We stand by our research conclusions and respectfully disagree with many of the points being made by ERI Scientific Beta.”

Ducoulombier and Amenc took issue with 13 sections of Mercer’s report, including the assertion that factor indices could be “dangerous” and were prone to crowding.

The ERI duo argued that “assessing crowding risk requires research, not just anecdotes, and there is little reason to be concerned about crowding if factor returns reward the taking of systematic risk”.

Mercer also stated in its report: “For investors facing few governance or fee constraints, we believe that truly unconstrained active strategies offer the potential to capture factor returns in an intelligent way, while also benefiting from market awareness and idiosyncratic alpha, potentially improving returns, controlling risk and enhancing diversification.”

In response, Ducoulombier and Amenc said: “Everyone is entitled to their beliefs, but investors would benefit if such beliefs were solidly grounded in scientific research, i.e. evidence-based as opposed to faith-based.

“Contrary to what is assumed here, it is perfectly possible to design market-aware dynamic factor strategies that remain fully systematic and highly diversified; these strategies even exist in the long/short space with some offering zero exposure to broad equity market risk.”

The full ERI Scientific Beta paper can be found here and a summary version of Mercer’s report here.