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40An 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.4. Comparison of Industry OfferingsRelative AnalyticsAnn. Rel. Returns - 3.23% 2.94% 3.10% 1.40% 1.85% 0.14%Tracking Error - 3.72% 4.45% 3.74% 4.65% 3.12% 4.81%Information Ratio - 0.87 0.66 0.83 0.30 0.59 0.03Outperf .Prob. (3Y) - 100.00% 91.80% 98.91% 83.33% 90.71% 62.84%Panel B: The MSCI World Index is used as the broad cap-weighted benchmark. The EW customised index is an equal-weighted combination ofthe Scientific Beta Developed Low Investment Multi-Strategy and Scientific Beta Developed High Profitability Diversified Multi-Strategy indices,rebalanced quarterly. The Scientific Beta Developed universe consists of 2,000 stocks.Dec 2004 – Dec 2014(10 Years)MSCI WorldIndexLowInvestmentMulti-StrategyScientific Beta DevelopedHighProfitabilityMulti-StrategyCustom EWCombinationMSCI WorldQuality IndexCompetitors DevelopedRussell DevQuality (HEFI)FTSEDevelopedQualityAbsolute AnalyticsAnn. Returns 6.59% 9.60% 9.84% 9.73% 8.95% 8.73% 8.29%Ann. Volatility 17.49% 15.31% 15.39% 15.31% 16.77% 16.90% 16.07%Sharpe Ratio 0.29 0.53 0.55 0.54 0.45 0.43 0.43Max Drawdown 57.46% 51.47% 49.98% 50.70% 48.01% 52.70% 49.51%Relative AnalyticsAnn. Rel. Returns - 3.01% 3.25% 3.14% 2.36% 2.14% 1.70%Tracking Error - 3.46% 3.46% 3.26% 4.24% 2.60% 2.87%Information Ratio - 0.87 0.94 0.96 0.56 0.82 0.59Outperf Prob. (3Y) - 100.00% 99.18% 99.73% 92.90% 94.54% 90.16%Exhibit 22 presents the results of a Carhart four-factor model regression for Scientific Beta’s highprofitability and low investment indices and its competitors’ “quality” indices. The statisticallysignificant coefficients are highlighted in bold. In the US, with the exception of the S&P 500 qualityindex, all other indices have statistically significant alpha, which implies that their excess returns arenot entirely explained by the other four factors. The Russell 1000 Quality (HEFI) index has a marketbeta close to 1, while the Scientific Beta custom multi-factor (EW) index is the most defensive, witha market beta of 0.92. All indices have negative exposure to the HML factor. The MSCI USA Qualityindex has negative SMB beta while all others have positive SMB exposure.In Developed, all indices show significant alpha, with that of Scientific Beta’s custom multi-factor(EW) index being the highest (+3.24%). The MSCI and Russell indices have high market beta whilethe Scientific Beta and FTSE indices are more defensive. The only common trait among these indicesis strongly negative exposure to the HML factor.