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Smart Beta Momentum Builds Globally, FTSE Russell Survey Finds

The growing popularity of multi-factor smart beta was one of the biggest changes from previous annual surveys.

  • Julie Segal

Three-quarters of institutional investors in North America, Europe and the Asia-Pacific region are using or considering smart beta strategies for their portfolios, as the investment trend continues to gain popularity globally, according to an annual FTSE Russell survey.

The global index and data provider’s survey of almost 200 asset owners found that investors are using smart beta to improve returns and diversification, as well as to save on fees. Only 9 percent of allocators decided against the strategy after seriously considering it, according to the firm’s report released Monday.

“Four to five years ago, some people said this was a flash in the pan, but we’re seeing continued strength in smart beta,” Rolf Agather, FTSE Russell’s managing director of research for North America, said in an interview.

Smart beta is based on academic research into the sources of stock and bond returns, with investors screening for such factors as low volatility and value to increase their gains. Smart beta strategies are expanding while becoming more popular globally.

Forty-six percent of investors surveyed said they already have an allocation to category, with 71 percent of those who adopted smart beta in the last two years opting for strategies that use a combination of multiple factors. Agather says the growing popularity of multi-factor smart beta was one of the biggest changes from previous surveys, outpacing the growth of fundamental indexes, one of the earliest versions of these types of strategies.

The shift is likely because fundamental indexes are some of the oldest smart beta investments, and represent a more mature category, according to Agather.

Fixed-income smart beta is still nascent, he said, and FTSE Russell included questions on the asset class for the first time this year. Seventy-three percent of respondents said they were not evaluating fixed-income and had no plans to do so, while 7 percent said they had made an allocation.

Agather says institutional investors are not as bullish on fixed-income in part because there isn’t as much academic and third-party research on factors in credit and bonds, and there are also fewer managers in the market with products. FTSE Russell expects fixed-income smart beta to grow as research evolves and more players enter the market.

FTSE Russell also gauged investors’ attitudes toward environmental, social and governance (ESG) smart beta for the first time this year. European asset owners are keenest, representing 60 percent of global investors interested in applying ESG considerations to their smart beta strategies. That compares with only 20 percent of North American allocators. Meanwhile, three-quarters of respondents who plan to apply ESG to smart beta are looking at ESG to avoid long-term risk and increase returns, not just as a societal good.

“That makes sense,” said Agather. “Most fiduciaries have to point to an investment outcome.”