The ‘smart beta’ growth trend eased slightly over the last year with just a 2 per cent uptick in adoption of the factor-based strategies among global institutional investors, a new survey reveals.
However, the survey by index provider FTSE Russell found of the 52 per cent of asset owners currently smart-beta-less about half were considering an allocation to the strategy “in the near term”.
Often described as a half-way house between active and index investing, smart beta encompasses a range of rules-based investment strategies focusing on single or multiple ‘factors’ such as low volatility, momentum, value and quality.
The fifth annual FTSE Russell survey of some 185 asset owners representing more than US$3.5 trillion, found smart beta uptake had almost doubled from 26 per cent in 2015 to 48 per cent at the last count.
While the latest annual smart beta inflation of 2 per cent pales in comparison to the two previous consecutive year-on-year growth-rates of 10 per cent, the report says about 60 per cent of existing users plan to increase allocations.
“Among the asset owners who had previously evaluated smart beta and decided not to implement, 37% are now re-evaluating their smart beta options,” the FTSE Russell survey says. “Most reported their reason for doing so as related to new developments in smart beta strategies as well as increased availability of off-the-shelf smart beta investment products.”
Smart beta was also increasingly seen as an efficient way to implement environmental, social and governance (ESG) policies, the survey shows. Almost 40 per cent of respondents already, or almost, in the smart beta camp planned to include ESG in their factor strategies.
“Of those who anticipate applying ESG considerations to a smart beta strategy, 48% said that ESG considerations are applied broadly across their portfolio, meaning the application of ESG to a smart beta allocation would occur by default,” the report says. “A similar number of respondents (42%) said they have chosen to apply (or are considering applying) ESG considerations to a smart beta allocation not by default, but due to the compatibility of these approaches.”
As per previous surveys, ‘return enhancement’ and ‘risk reduction’ were cited as the two most common reasons (about 60 per cent each) for using smart beta followed by better diversification (39 per cent) and cost savings (31 per cent).
Multi-factor combo was the most popular smart beta strategy (49 per cent) with low volatility (35 per cent) and value (28 per cent) also rating highly.
“Sixty-one percent of asset owners do not believe factor timing strategies are likely to be successful, while 28% believe it is possible to successfully time factors,” the report says.
Other survey findings include:
- a more even distribution of the strategy adoption among asset owners of all sizes compared to last year;
- an increase in those using single strategies (including multi-factor) – 51 per cent in 2018 versus 34 per cent the previous year – rather than investing two or more approaches; and.
- only 9 per cent accessing fixed income via smart beta and about a quarter thinking about it.
In a statement, Rolf Agather, FTSE Russell managing director of North America Research, said with five years of data to interpret the survey offered “unique insight across the industry” on smart beta trends.
“While some results from this year’s survey serve to reconfirm long-term growth in awareness and usage of smart beta indexes, others highlight areas that are continuing to emerge,” Agather said. “Notably, awareness and usage of multi-factor and ESG smart beta indexes are growing in recent years. And our survey notes some differences between investors across markets, specifically the US, UK and Canada.”
With more than 60 per cent of smart beta clients either ‘satisfied’ or ‘very satisfied’ (albeit that this category dropped to 9 per cent in 2018 from 17 per cent the year before) the smart beta market looks set for further growth, the FTSE Russell study says.