Dr. Thomas Pfiffner
Head of Smart Beta
Optimized indexing with IsoPro®
An optimized replacement for passive core investments.
Finreon IsoPro® is one of the largest and most successful smart beta strategies in Switzerland and combines three efficient and scientifically based drivers of outperformance into a robust investment concept.
For over 10 years, investors have been able to benefit from improved diversification and systematic outperformance by addressing the design flaws of market capitalized indices.
Finreon IsoPro® reduces uncompensated concentration risks while achieving higher returns. The solution is ideally suited as a substitute for core equities – with the prospect of systematically higher returns for the risk.
Smart Beta – invest intelligently
Traditional indices are capitalization weighted, i.e. the weight of a stock constituting the index is determined by its market value. The concept Smart Beta (or: Optimized Indexing) refers to all alternative weighting methods which reflect the market risk (the so-called Beta) in a more intelligent way than classical indices.
Smart Beta gains in importance
It is estimated that over 1’200 billion dollars are invested in Smart Beta assets worldwide, where the assets under management in Europe have been increased by a factor of eight during the last 3 years.
Why Smart Beta? The academic research indicates the inefficiency and construction deficits of capitalization weighted indices for a long time. Smart Beta means to construct an index in an alternative way with the target to achieve more return for the taken risk.
With its established IsoPro®-methodology, Finreon is one of the leading Smart Beta provider in Switzerland
Passive index funds seek to replicate an index as close as possible. This kind of index construction, however, carries some significant problems. Most of the large indices, such as the Swiss Performance Index SPI, the German equity index DAX or the American equity index S&P 500 are capitalisation weighted, i.e. the weight of every single stock constituting the index is calculated based on its market value. Therefore, many indices struggle with concentration risks: The five largest positions of the Swiss Performance Index add up to more than 60 % of the total index' market capitalization. Additionally, capitalisation weighted indices are by definition constantly overweighted in overvalued stocks while undervalued stocks are underweighted (so called ‘passive noise’). Finally, indices are also inefficient as the correlations among the index constituents and their volatilities are ignored in portfolio construction.
These structural deficits of indices are systematically eliminated by employing the IsoPro®-methodology, which seeks to generate higher relative returns and to minimize the risks.
The innovative IsoPro®-methodology was developed by Finreon and allows to benefit from passive investments while avoiding their shortcomings. In a first step, the IsoPro®– methodology is based on equal weighting (Iso), i.e. the same weight is allocated to every index, provided there are no liquidity issues. By this means, both concentration risks and passive noise (overweight overvalued and underweight undervalued stocks) can be reduced. In a second step, the weights are optimized towards the minimum-variance portfolio (Pro). In other words: Positions weights are changed in order for the portfolio to reveal an optimal risk-return profile.
This portfolio has approximately the same risk as the capitalization weighted index in the long term and is therefore a suitable substitute of a passive core-investment. With respect to e.g. the Swiss Performance Index SPI over the last twelve years, just by eliminating these structural deficits, an outperformance of approximately 2 % p.a. would have resulted.
Invest simply and efficiently in the Swiss equity market without cluster risks and systematically achieve more return for the risk with Finreon Swiss Equity IsoPro®.
Finreon Swiss Equity IsoPro® invests in a maximum of 75 of the largest, most liquid Swiss stocks. The solution is available as a fund or as a customised mandate.
More return for risk on global equities with Finreon World Equity IsoPro®.
Finreon World Equity IsoPro® invests in a maximum of 750 of the world's largest and most liquid stocks. The solution is available as a simple fund tailored to pension funds and exempt from US withholding tax, or as a customised mandate.
US, European and Emerging Markets equities
The Finreon IsoPro® approach is available on a mandate basis on the US and European equity markets as well as on emerging markets. We will be happy to advise you individually and find the right solution for you.