Smart Beta Assets Rise

increase arrowTowers Watson’s institutional investment clients globally allocated more than US$8 billion to smart beta strategies last year, bringing the total exposure to around US$40 billion (in 550 portfolios) in these strategies, across a range of asset classes.

This compares to the company’s clients having a US$32-billion exposure to smart beta strategies at the end of 2013 and US$20 billion in 2012.

“Interest in thinking smartly about betas within portfolios remains high but there is a considerable degree of caution about the proliferation of products labelled smart beta,” says Luba Nikulina, global head of manager research at Towers Watson.

“We believe smart betas should be easy to describe and understand, which many of these labelled products are not, as often they are poorly implemented and seem naïve about the inherent risks,” she adds.

The data also show that last year Towers Watson’s institutional investment clients carried out diversifying strategies worth US$10 billion. Among those strategies, real estate attracted the most interest (more than US$3 billion), with one tenth in smart beta, followed by infrastructure (US$2.3 billion), where one third is in smart beta. In the same period, liquid diversifying strategies attracted US$1.7 billion, of which more than a third are in smart beta.

Additionally, figures reveal that credit selections by Towers Watson’s clients in 2014 totalled US$34.8 billion, of which the majority were invested in global bond mandates, followed by U.S. and Australian bonds. During the year, only US$1.5 billion was invested in smart beta in the bond area.

“Perhaps unsurprisingly, smart beta innovation in the bonds space has been slower than in equities, partly due to the nature of the indices and the level of complexity which comes with the territory,” Nikulina says. “In terms of smart beta, bonds are where equities were five years ago.”

In equities, global mandates, totalling around US$7 billion, were the most popular with Towers Watson’s clients in 2014, followed by U.S. equity and U.S. small/mid cap equity mandates. During the year, emerging market equities attracted US$1.8 billion, while US$1 billion was invested in global (excluding U.S.) equities. The company’s clients invested US$500 million in long-short equity in 2014. In total, equity mandate selections in 2014 accounted for US$20.3 billion in assets, with smart beta accounting for US$1 billion.