A top European academic institution known for analyzing factor-based investing has attacked a Mercer report for “undocumented opinions” on the strategy that risk misinforming investors.
In a paper this month, EDHEC-Risk Institute’s scientific beta division blasted Mercer’s November report on “Factor Investing: From Theory to Practice,” accusing the consultant of putting its commercial interests ahead of evidence-based research.
The investment consultant’s beliefs “align nicely with their bottom line but not so much with the bottom lines of end-investors,” Noël Amenc, chief executive officer of ERI Scientific Beta and Frédéric Ducoulombier, associate professor of finance at the EDHEC-Risk Institute, said in the paper.
They took aim at Mercer’s suggestion that investors who use traditional quantitative strategies review their holdings against comparable actively managed multi-factor strategies, as it’s possible to find “well-constructed, active, multi-factor strategies” with similar factor biases but cheaper.
“There is no basis for preferring actively managed to systematic multi-factor strategies for quantitative strategy substitution applications,” the authors of the EDHEC-Risk Institute paper wrote. “It is particularly distressing to see an advisor that also sells active investment management dismiss systematic strategies and reintroduce alpha into smart beta.”
The paper also takes issue with Mercer’s assessment of crowding risks associated with investing in factor indices, which the investment consultant said can be “dangerous.” The academics said 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.”
A Mercer spokesman said it’s only natural for people to have “different perspectives.” In statement, he said that “We stand by our research conclusions and respectfully disagree with many of the points being made by ERI Scientific Beta.”
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The public disagreement with Mercer comes at an uncomfortable time for the firm, as the U.K.’s Competition and Markets Authority has been investigating the investment consulting industry. The probe was triggered by the Financial Conduct Authority’s review of the sector, which turned up “serious concerns” that institutional investors were not receiving good advice, according to an FCA announcement in September.
The FCA’s Asset Management Market Study, released last year, said the regulator was concerned that the dominance of the “big three” investment consultants in the U.K. market — Aon Hewitt Investment Consulting, Mercer and Willis Towers Watson — was potentially making it difficult for smaller consultants to develop their business.ddd