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24An ERI Scientific Beta Publication — The Dimensions of Quality Investing: High Profitability and Low Investment Smart Factor Indices — July 2015Copyright © 2015 ERI Scientific Beta. All rights reserved. Please refer to the disclaimer at the end of this document.2. Smart Factor Indices for High Profitabilityand Low Investment TiltsExhibit 10: Drawdown Analysis of High Profitability and Low Investment Smart Factor IndicesThe analysis is based on daily total return data from 31 December 1974 to 31 December 2014 (40 years). The benchmark is the cap-weightedportfolio of all stocks in the Scientific Beta LTTR US universe. Maximum drawdown represents the maximum loss an investor can suffer from investingin the strategy at the highest point and selling at the lowest. It is the largest single drop from peak to bottom in the value of a portfolio (before a newpeak is achieved). Maximum relative drawdown is the maximum drawdown of the long/short index whose return is given by the fractional changein the ratio of the strategy index to the benchmark index. The Cornish-Fisher VaR is computed using the Cornish-Fisher extension that adjusts the VaRfor the presence of asymmetry (i.e. skewness) and/or heavy tails (i.e. excess kurtosis) in the return distribution. VaR is based on historical returns andmeasures the possibility of maximum daily loss. The level of 5% means that there is only a 5% chance that the strategy will experience a daily lossthat is greater than the reported loss. The Cornish-Fisher VaTER is similar to the Cornish-Fisher VaR except that it provides the worst expected loss ofthe strategy relative to the CW benchmark. The Scientific Beta LTTR US universe consists of the 500 largest US stocks.US Long Term(Dec-1974 to Dec-2014)Absolute AnalyticsAll Stocks CWLow InvestmentCWLow InvestmentMulti-StrategyHigh ProfitabilityCWHigh ProfitabilityMulti-StrategyMaximum Drawdown 54.53% 53.38% 53.20% 52.29% 48.28%Maximum Time Under Water 1594 1141 935 2802 856Start of Max Time Under Water 04-Sep-00 16-Jul-99 04-Jun-07 27-Mar-00 13-Jul-07End of Max Time Under Water 13-Oct-06 01-Dec-03 03-Jan-11 22-Dec-10 25-Oct-10Cornish Fisher 5% VaR (daily) 1.47% 1.35% 1.30% 1.46% 1.38%Relative AnalyticsMax Relative Drawdown - 26.47% 38.49% 20.27% 25.21%Max Relative Time Under Water - 2083 1944 4095 1837Start of Max Relative Time Under Water - 18-Apr-94 25-Mar-94 14-May-75 21-Nov-94End of Max Relative Time Under Water - 11-Apr-02 06-Sep-01 23-Jan-91 05-Dec-01Cornish Fisher 5% VaTER (daily) - 0.37% 0.51% 0.31% 0.41%2.2.3. Conditional Performance AnalysisExhibit 11 presents the conditional performance analysis of US long-term profitability andinvestment smart factor indices. The low investment multi-strategy index outperforms by 2.69%and 5.38% in bull and bear markets respectively. The low investment CW index outperforms byjust 0.08% in bull and 4.22% in bear markets. The high profitability multi-strategy index has anoutperformance of 3.65% and 2.63% in bull and bear markets respectively. Its CW counterpartoutperforms in bull markets (0.03%) and delivers 1.08% in bear markets, showing a clear inclinationtowards bear markets.It is essential to analyse the conditional performance to assess the robustness of weightingschemes. It is clear that investment and profitability multi-factor indices tend to provide morebalanced outperformance across different market conditions compared to the tilted cap-weightedindices.