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Smart beta strategies retain momentum

According to a survey by FTSE Russell among “almost 200 asset owners”, global usage of smart beta strategies has leapt 10 percentage points to 46% in 2017. Whereas North American investors were early adopters of plain vanilla index trackers, their European peers have been taking the lead as far as factor-based index investing is concerned: smart beta usage in Europe increased from 52% in 2016 to 60% in 2017, but adoption grew at a faster pace in the rest of the world (see chart).

Roughly 40% of smart beta users in the survey said they are (very) satisfied with their investments in the area, while only 2% said they are dissatisfied. In another sign smart beta investors are indeed serious about it, 63% of users said they are evaluating additional smart beta strategies with a view to increasing their allocation.

Perceived risk reduction and return enhancement are the most important reasons for investors to evaluate smart beta strategies, cited by more than half of respondents. But ‘improved diversification’ and cost savings are becoming more important drivers, reflecting the growth of available strategies and the downward pressure on fees.

Multi-factor & ESG

Multi-factor smart beta products saw a strong jump in popularity, with usage rising from 37% in 2016 to 64% in 2017. The increase is driven mainly by first-time users, of which there are many. More experienced smart beta investors also use multi-factor strategies, often alongside an allocation to value and/or low-volatility strategies.

The survey also looked into the application of ESG considerations for smart beta investors, which produced some stark findings. Most European survey respondents who use or intend to use smart beta strategies said they are looking to incorporate ESG screens, while only 20% of North American investors have that intention. Larger asset owners, those with more than $10bn in assets under management, are also a lot more serious about ESG than smaller players.   



Part of the Mark Allen Group.