Study Shows Smart Beta’s Takeover

Nearly half of asset owners have adopted the factor-based strategy, up from just over a quarter in 2015.

Simon Dawson/Bloomberg

Simon Dawson/Bloomberg

The proportion of asset owners investing in smart beta strategies globally has almost doubled over the past three years, according to new research by FTSE Russell.

Forty-eight percent of respondents to the index provider’s fifth annual smart beta survey said they had invested in smart beta, a slight uptick from 46 percent in 2017. Although the spread of smart beta has slowed over the last year, adoption has nearly doubled since 2015, when 26 percent of asset owners surveyed had allocations to the factor-based strategies.

The FTSE Russell report showed that smart beta has grown especially popular in Europe: Sixty-one percent of European respondents said they had a smart beta allocation in this year’s survey. Meanwhile, North American investors had the highest year-over-year increase in smart beta adoption, with 42 percent reporting an allocation, up from 37 percent in 2017.

The survey included responses from 185 asset owners with combined assets under management of more than $3.5 trillion. A majority of respondents were based in North America, with just under a third from Europe.

Among asset owners with portfolios larger than $10 billion, 56 percent had smart beta allocations. Meanwhile, 39 percent of funds under $1 billion said they were invested in smart beta, a sharp increase from last year’s 19 percent.

For those that fell in between, the smart beta adoption rate was 43 percent, down from 57 percent in 2017.

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According to the survey, multi-factor smart beta strategies are the most popular, followed by low-volatility and value strategies.

Respondents with smart beta allocations were largely pleased with the investment, with 62 percent reporting that they were either “satisfied” or “very satisfied.”

Still, the asset owners polled by FTSE Russell said there were still several barriers to more widespread adoption of smart beta. Forty-five percent said they were unsure how to determine the best strategy for their portfolio, while 36 percent were worried about unintended factor biases.

Others cited the growth in smart beta investing as a detractor. Among the survey’s respondents, about a third believed increased adoption of the strategy could erode future returns.

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