Smart beta adoption grows but challenges remain, finds FTSE Russell

May 23rd, 2018 | By | Category: ETF and Index News

Nearly half of asset owners globally have an existing allocation to smart beta strategies, according to the fifth annual FTSE Russell smart beta survey. Forty eight percent of asset owners now use smart beta, the highest adoption rate since the survey’s inception in 2014.

Rolf Agather, managing director of North America research, FTSE Russell

Rolf Agather, managing director of North America research, FTSE Russell.

Rolf Agather, managing director of North America research, FTSE Russell, said, “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.”

The survey reflects trends seen in the ETF industry, where smart beta assets under management have enjoyed a compound annual growth rate of 32.6% over the past five years to reach AUM of more than $640 billion, according to ETFGI.

Although 48% represents only a two percentage point increase from last year, the figure rises to 91% of asset owners when including those who have evaluated or are planning to evaluate smart beta in the next 18 months. This is a notable increase from 2014 when the survey was first fielded, where 75% of asset owners had a smart beta allocation, evaluated or were planning to evaluate smart beta.

Yet despite a very strong growth in adoption, FTSE Russell notes that educational shortfalls remain. The top barrier to entry, cited by 45% of survey respondents, is an inability to determine the best strategy (or combination of strategies) for smart beta implementation. The figure was above 50% when evaluating US- and UK-based asset owners only.

The next most significant barriers to entry are unintended factor biases (cited by 36% of asset owners), capacity – i.e. concern that growth in smart beta investing may erode these strategies’ future returns (cited by 33%), and unintended sector biases (cited by 22%).

Among those global asset owners who are currently implementing smart beta, multi-factor combination strategies were the most popular and used by 49%, a notable rise from 20% when first measured in 2015. Furthermore, 70% of asset owners are currently evaluating multi-factor combination smart beta strategies, far surpassing all other strategies. Notably, asset owners in the US and the UK are showing more interest in multi-factor smart beta index-based strategies; however, lack of education was cited as a major barrier to implementation.

The next most popular strategies currently being employed are low volatility strategies (cited by 35% of smart beta users) and value-based strategies (cited by 28%).

However, amid the rapidly growing interest in multi-factor combination smart beta strategies, asset owner interest in fundamentally weighted strategies has declined. In 2018, 19% of global asset owners surveyed with an existing smart beta allocation are using these strategies, down from 41% when first measured in 2014.

Though a relatively new entry into FTSE Russell’s annual survey, smart beta indices measuring environmental, social & governance (ESG) factors are clearly on the rise. Nearly 40% of asset owners surveyed anticipate applying ESG considerations to a smart beta strategy in the next 18 months.

Notably, asset owners are looking to ESG index-based strategies for performance reasons and not just asset allocation or societal good. In 2018, 44% of asset owners surveyed were considering ESG for performance reasons, a 13% increase from 2017 when ESG smart beta index awareness and usage was first measured.

The survey was conducted in January and February 2018 and includes responses from 185 asset owners with the majority of participants drawn from North America (54%), Europe (31%), and Asia Pacific (11%). A wide mix of organisations is represented including government organisations (36%), corporations or private businesses (20%), non-profit organisations or universities (15%), and unions or industry-wide pension schemes (10%) – with the rest a mix of insurance companies, sovereign wealth funds, healthcare organisations and family offices.

Sixty seven percent of survey respondents manage defined benefit plan assets, 36% manage defined contribution plan assets and 15% manage endowment or foundation assets. Respondents also included asset owners with insurance general accounts, sovereign wealth funds and other types of institutional entities.

In terms of the assets under management of respondents, 20% have under $1bn, 39% have $1-10bn and 41% have more than $10bn. The total AUM of survey participants is estimated to be over $3.5 trillion.

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