Almost half of asset owners globally have invested in ‘smart beta’ strategies, according to a new survey from index provider FTSE Russell, up from just 36 per cent a year ago with multi-factor approaches dominating current allocations.
The fourth FTSE Russell annual smart beta report found institutional investors were also on the hunt for environmental, social and governance (ESG) quasi-active solutions while noting some “nascent” interest in fixed income strategies.
However, multi-factor smart beta solutions topped the charts in the 2017 survey, tripling in popularity in just two years.
“Among asset owners with a smart beta allocation, multi-factor combination strategies have grown from 20% in 2015, the first year asked, to 64% in 2017,” the FTSE Russell report says. “Low volatility remains the most popular single factor strategy, followed by value.”
The study identifies late-adopters as driving the multi-factor trend as the majority (67 per cent) of investors with more than two years’ experience in smart beta maintain multiple investments in individual factor strategies.
“But among asset owners who have adopted smart beta in the past two years, the majority (56%) are combining strategies within a single multi-factor strategy or product, which aligns with the increase we report in multi-factor combination strategy use and evaluation,” the FTSE Russell report says. “In future years, we expect that asset owners will increasingly take the approach of adopting an integrated multi-factor strategy.”
Institutional investors were also interested ESG solutions with 41 per cent of those surveyed keen to screen their smart beta allocations. However, the survey shows a large continental divide with 60 per cent of European investors backing the ESG smart beta approach and just 20 per cent in North America.
Most investors were interested in using ESG smart beta strategies to manage long-term investment risk (such as climate change) rather than for ‘social good’ reasons, the survey found.
Fixed income continues to be the laggard in the space with only 7 per cent of respondents currently investing in the asset class via smart beta and 20 per cent kicking the tyres.
“One explanation for nascent levels of fixed income smart beta adoption is the absence of established themes that have been proven over an extended periodicity to be able to deliver yield-enhanced risk-adjusted performance relative to the beta benchmarks,” the FTSE Russell study says. “While equity smart beta strategies benefit from extensive time series that have revealed a number of themes that are statistically relevant, the data and research to uncover these themes are not yet available for fixed income.”
Nonetheless, FTSE Russell says the fixed income smart beta sector should expand as more products and research come to light.
Overall, the report says the smart beta trend is on track for further growth with most existing investors looking to maintain or increase their allocations with a queue of new entrants also forming.
“Among current evaluators with an existing smart beta allocation, nearly 70% plan to increase their allocation,” the study says. “Of those asset owners without existing allocations who are currently evaluating smart beta, roughly half expect to make an allocation, while only 13% do not plan to make an allocation, consistent with last year‘s survey results.”
Only a tiny proportion of the almost 200 asset owners surveyed across multiple jurisdictions (including 19 per cent based in the Asia-Pacific region), who have investigated smart beta options later failed to invest, Rolf Agather, FTSE Russell managing director North America, says in the report.
“Just 9% of survey respondents have evaluated smart beta indexes and chosen not to implement any,” Agather says. “Clearly, smart beta indexing has become an important part of the industry conversation.”
Respondents cited “risk reduction, return enhancement and improving diversification” as the main reasons for using smart beta strategies.
“Cost savings continues to grow in importance, indicating that smart beta is increasingly being used in place of active strategies,” the report says.
According to the FTSE Russell report, about a third of investors allocate to smart beta out of existing active equities while a slightly smaller proportion (27 per cent) take it out of their passive budget. The remaining third of investors shift to smart beta from both passive and active equity strategies.
Last year the NZ Superannuation Fund handed $600 million out of its almost $5 billion global passive equities allocation to two smart beta factor strategies – value and low volatility – managed by Northern Trust.
The survey respondents included pension funds, sovereign wealth funds, fund managers and not-for-profits across a wide range of assets under management.
FTSE Russell is owned by the London Stock Exchange.