Asset Owners Looking to Use Smart Beta Solutions

The roles assumed by investment managers, consultants and index providers in the evaluation of smart beta vary depending on AUM tiers of asset owners.

According to its third annual global institutional market survey, Smart Beta: 2016 Global Survey Findings from Asset Owners, FTSE Russell confirms that the percentage of asset owners currently evaluating smart beta has more than doubled from 15% at the first survey in 2014 to 36% in 2016, and 62% of asset owners with an existing smart beta allocation are now evaluating additional allocations.

For the purposes of the survey, “smart beta” is defined as an index-based investment strategy that is not traditionally market cap–weighted (i.e., fundamentally weighted, equal weighted, factor weighted, optimized, etc.).

The survey finds the strongest growth in smart beta adoption is among asset owners with less than $1 billion in assets. Return enhancement and risk reduction continue to be the primary objectives for use of smart beta by asset owners; cost savings are more important in 2016 than in years past.

The percentage of asset owners using five or more smart beta indexes increased significantly, from 2% in 2014 to 21% in 2016. While low-volatility and value factor indexes still lead in asset owner implementation, adoption of multi-factor combination indexes has nearly doubled in the last year and is now a close third. And, nearly 70% of asset owners take a long view on smart beta, planning to use smart beta indexes five years or longer to help achieve investment objectives. Smart beta index-based investments are increasingly being considered as part of an active allocation, with 35% considering it an exclusively active strategy, from 22% last year.

NEXT: Vehicles for using smart beta and evaluating smart beta options

Separate accounts are the most preferred vehicle for strategic implementation of smart beta, driven by demand from asset owners with more than $1 billion in assets. For tactical implementation of smart beta, asset owners are using a wide range of vehicles, including internal management of assets, separate accounts, exchange-traded funds (ETFs) and CITs (collective investment trusts).

The roles assumed by investment managers, consultants and index providers in the evaluation of smart beta vary depending on AUM tiers of asset owners. External investment managers are most extensively engaged with asset owners under $1 billion in AUM; consultants with asset owners between $1 billion to $10 billion in AUM; and index providers with asset owners with $10 billion or more in AUM.

“The survey demonstrates accelerating interest in and implementation of smart beta indexes among global institutional asset owners,” says Rolf Agather, managing director of North America research, FTSE Russell. “While many asset owners and consultants have increased their understanding of smart beta, continuing innovations in other asset classes and the multi-factor arena underscore the need for more information and education. We hope the results of the survey provide a degree of insight for all market participants with an interest in smart beta.”

The third annual survey was conducted in January and February 2016. The 253 asset owners included this year (up from 214 last year and 181 in 2014) are drawn from North America (49%), Europe (33%) and Asia (13%). Survey results can be requested from FTSE Russell’s website.