The smart beta trend has hit warp speed, according to new research from index provider FTSE Russell, with interest from global institutional investors up more than 60 per cent over the year.
Over 70 per cent of asset owners are either “using or actively evaluating smart beta” the 2016 FTSE Russell smart beta survey found, compared to 44 per cent by the same measure in the previous year’s survey.
Rolf Agather, FTSE Russell head of North America research, said: “The survey demonstrates accelerating interest in and implementation of smart beta indexes among global institutional asset owners.”
Since the index firm’s first survey of global asset owners in 2014, the proportion of respondents evaluating smart beta strategies jumped from 15 per cent to 36 per cent in the latest study.
“Clearly, the smart beta ‘phenomenon’ has matured to the point that large numbers of asset owners now consider smart beta indexes to be an important part of the investing toolkit,” the FTSE Russell report says.
Confidence in smart beta has also improved over the year, the survey shows, with 74 per cent either ‘very satisfied’ or ‘satisfied’ with their strategies’ ability to meet investment goals compared to 61 per cent in 2015.
The ‘Smart beta: 2016 global survey findings from asset owners’ study also reveals 62 per cent of those respondents who already invest in such strategies are looking at expanding their exposure to other smart beta indexes.
“The percentage of asset owners using five or more smart beta indexes increased significantly, from two percent in 2014 to 21% in 2016,” a FTSE Russell statement says.
Low-volatility strategies remain the most popular smart beta approach (used by 46 per cent of respondents) closely followed by value (41 per cent) and multi-factor combinations (37 per cent) – the latter strategy almost doubling in use over the last 12 months.
Momentum and high-quality strategies also grew in popularity over the year – both finishing with 22 per cent support – while the minimum variance approach held its ground at about 20 per cent.
As well as a change in the strategy mix since the 2014 survey, the rationale for adopting smart beta has also evolved over the period, the FTSE Russell report says.
“For the last three years, return enhancement and risk reduction have been the top two objectives for users of smart beta,” the study says. “In 2014 and 2015, these two objectives were equally important, but in 2016, return enhancement is cited by 58% of asset owners, compared to 46% citing risk reduction. Also notable in 2016 is the increase in importance of cost savings, compared to 2014 and 2015.”
The majority of respondents (58 per cent) also intended to use smart beta investments primarily for long-term strategic asset allocation purposes.
However, almost 40 per cent of respondents said they use smart beta for both strategic and tactical asset implementation with only 3 per cent targeting short-term tactical moves only.
The survey found significant regional differences with almost half of European investors rating smart beta indexes “as an appropriate benchmark” compared to 39 per cent in North America and just 27 per cent in Asia-Pacific.
“Asset owners in North America are more likely to view smart beta indexes as a tool to help control against unwanted exposures or to introduce wanted exposures, and as a tool for research and analysis,” the FTSE Russell report says.
The survey garnered feedback from 253 asset owners spread across North America (49 per cent), Europe (33 per cent) and Asia-Pacific (13 per cent) whose collective funds under management amounts to over US$2 trillion.
FTSE Russell was formed last year after the London Stock Exchange merged its long-established FTSE benchmark business and with the index arm of Frank Russell, acquired in 2014.