The analysis, based on the firm’s recent “Beyond Active and Passive, Advanced Beta Comes of Age” study, finds advanced or “smart” beta strategies are playing a more influential role in some of the world’s largest portfolios.
As part of the study, SSgA polled 300 institutional investors across North America and Europe, finding 42% of respondents currently use some type of advanced beta strategy in portfolio construction. Another 24% plan to do so over the next three years, says SSgA.
According to Adrian Banner, CEO and chief investment officer of INTECH Investment Management LLC, which provides access to smart-beta portfolios and mathematically driven investment solutions, the terms "smart beta" and "advanced beta" don’t have precise definitions. Generally, he says, smart beta describes rules-based investment strategies that do not rely on market-capitalization weighting to set asset allocations within an index-tracking portfolio.
Historically, Banner says, smart beta strategies weighted a portfolio’s asset allocations by revenue, earnings and gross domestic product, among other rules. The most popular strategies today, Banner says, include equal weighting, fundamental weighting and minimum variance weighting.
“It wasn’t always called smart beta, but the reweighting element has always been central to these types of strategies,” Banner says.
Put simply, smart beta assumes that better diversification and rebalancing rules can generate returns that exceed the capitalization-weighted index without expanded risk or excessive oversight. Like indexed investments, smart beta’s most attractive features typically include low management fees, high transparency and low asset turnover.
According to the SSgA analysis, 75% of investors say that these factors make smart beta strategies an attractive alternative to both active and passive fund management, as well as a powerful evolution in asset allocation strategies (see “Head of the Class: Smart Beta”).
“Advanced beta strategies play an important role in helping investors construct holistic investment strategies while keeping risk and costs in check,” says Lynn Blake, chief investment officer for global equity beta solutions at SSgA. “Our study found that more than half of institutional investors in North America and Europe will be using advanced beta strategies in the near future.”
Blake says that recent spikes in equity market volatility, and a reduced appetite for active strategies coming out of the industry’s focus on fee reasonability, may encourage further adoption of advanced beta, based on its track record of improving risk adjusted returns.
Other findings in the SSgA study show that Europe is ahead of the U.S. when it comes to institutional investor adoption, allocation to and measurement of advanced beta strategies. The study finds 25% of European respondents are allocating 20% or more of equities in their portfolio to advanced beta—compared to just 4% for North American respondents.
Nearly 40% of investors with a current allocation to advanced beta are using low-volatility and low-valuation strategies, either combined or separately. But while 70% of institutional investors report high levels of awareness about advanced beta, only 40% are confident about the positive impact of implementation.
“The main advantage that advanced beta strategies provide is the ability to select a portfolio that best meets specific risk and return objectives, versus taking a one-size-fits-all approach,” says Kristi Mitchem, executive vice president and head of the Americas institutional client group at SSgA. “While we are still on the early part of the adoption curve with these strategies, investors are becoming aware that similar returns can be achieved at a lower cost than traditional active management. That is a trend that can’t be ignored.”
Complete results from the study are available here.