Smart beta strategies on the rise: survey

A large majority (91 per cent) of institutional asset owners either have some allocation to a smart beta strategy, have evaluated the concept or are planning to evaluate it in the coming 18 months, according to FTSE International Ltd.’s latest survey on the area.

“With five years of results for our global smart beta survey, we are able to offer unique insight across the industry on how the preferences and needs of our global clients are changing,” said Rolf Agather, managing director of North America research at the FTSE Russell, in a press release.

“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. 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 U.S., U.K. and Canada.”

The growth in interest represents a 16 per cent increase from 2014, when FTSE Russell first began the survey. With that growth, however, institutional investors face barriers in education around implementing smart beta, the survey found. Indeed, 45 per cent of respondents felt that determining the best strategy or the right combination of approaches was a top barrier to entry in the United States and Britain.

Read: Global smart beta allocations reach new high: survey

Multi-factor combination smart beta strategies were of particular interest to survey respondents, with 49 per cent using them. That was a notable rise from 20 per cent when the issue first appeared in the survey in 2015. Indeed, 70 per cent are currently evaluating multi-factor combination strategies. Interest in fundamentally weighted smart beta strategies declined, with only 19 per cent of asset owners with an existing smart beta allocation using them, down from 41 per cent in 2014.

Another trend on the rise is the use smart beta indexes measuring environmental, social and governance factors, with 38 per cent of investors anticipating they’ll apply them to a smart beta strategy in the next 18 months. Performance is a key driver into that area, the survey found, with 44 per cent of owners considering it. That was up from 13 per cent in 2017, when the survey first measured awareness of smart beta indexes measuring environmental, social and governance factors. Societal good, however, does remain the top reason (63 per cent) given for implementing such factors within a smart beta strategy, followed by avoidance of long-term risk at 54 per cent.

Read: A look at options for integrating ESG factors into smart beta strategies