Posted inInvestment

Institutional investors’ smart beta use breaks through 50% barrier

FTSE Russell interviewed some 250, mainly institutional investors on their usage of smart beta strategies, a third of which were from Europe. According to the survey, 52% of the European respondents use smart beta, up from 40% in 2015. This compares to 28% in the US and 38% in Asia-Pacific. Even though smart beta adoption is becoming more widespread, this trend should not be overstated: two thirds of smart beta users have been investing in it for more than five years.

European investors do not only invest in smart beta more often, they also dedicate considerably more of their money to such strategies. Some 54% of European smart beta users have more than a fifth of their equity portfolio invested in smart beta, compared to just 21% for American investors.

Its perceived potential to generate better returns is institutional investors’ main driver to invest in smart beta. Risk reduction is also an important motivation, both for smaller and larger investors. However, it seems that especially investors with more than $10bn in assets under management look for smart beta to provide specific factor exposure. Almost half of large investors cite this as an important motivation to invest in smart beta, compared to only 16% of investors with less than $1bn under management.

Investors eye multi-factor

So which factors are investors looking to get exposure to through smart beta strategies? Low volatility and value are the most widely-used single factor strategies, with respectively 46% and 41% of users. Multi-factor strategies are making a fast ascent though: some 37% of smart beta users employ this type of strategy, up from 20% in 2015.

Because most investors invest in smart beta for the long term, and since no single factor is likely to show persistent outperformance, it looks like a sensible step to invest in multi-factor strategies. And its popularity is indeed likely to continue: according to the survey, multi-factor strategies are by far the most likely type of smart beta investment to be included in investors’ portfolios.

Part of the Bonhill Group.