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Most Asset Owners Are Now Smart Beta Investors

For the first time in the history of the survey, a majority of institutional investors polled by FTSE Russell said they had adopted the factor-based index strategy.

Adoption of smart beta has spread to over half of asset owners globally, according to a new survey of allocators by FTSE Russell.

Out of 178 retirement plans, endowments, foundations, and other institutions polled by the index provider, 58 percent said they had allocations to smart beta strategies, up from 48 percent last year. Another 20 percent said they were currently evaluating or planned to evaluate adding smart beta to their portfolios.

Smart beta — defined by FTSE Russell as any index-based strategy that is not weighted by market capitalization — has nearly doubled in popularity since the survey’s debut in 2014, when 32 percent of respondents reported smart beta allocations. Smart beta strategies utilized by survey respondents included funds tied to investment factors like low-volatility, value, and momentum, as well as equal-weighted and fundamentally weighted indexes.

By far the most widely used strategy, according to the survey, was multi-factor smart beta. Close to three-quarters of respondents with smart beta investments reported having allocations to multi-factor funds, up from 49 percent last year. The next-most-popular strategy, low-volatility, was employed by 35 percent of respondents.

Meanwhile, adoption of fixed-income smart beta funds remained low, with just 11 percent reporting an allocation to the strategy.

[II Deep Dive: Why Factor Investing Isn’t Working]

The investors included in the sixth annual survey represented over $5 trillion in assets under management. Almost half of respondents were based in North America, while 29 percent hailed from Europe and 19 percent were from the Asia Pacific region.

In a statement, FTSE Russell managing director Rolf Agather said the growth in smart beta adoption has been driven by investors’ desire for return enhancement, risk reduction, and improved diversification. This was reflected by the results of the survey, which asked investors which investment objectives had prompted them to evaluate smart beta strategies. Sixty-eight percent cited return enhancement, while 52 percent said risk reduction and 48 percent pointed to diversification benefits.

In addition, 31 percent said they were interested in the potential cost savings, while 22 percent sought exposure to a specific investment factor.

Investors who were re-evaluating allocating to smart beta after previously deciding against it said they were primarily motivated by their increased understanding of the strategy through new information and education. The second-biggest reason cited by these respondents was the longer track records now available for smart beta funds.

 “We expect sustained growth in smart beta, especially when it comes to multi-factor combination strategies,” Agather said.

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