Asset owners may debate what to call alternatively weighted or factor-based indexes, but adoption among the largest institutional investors is clearly strong, growing and broad-based according to Russell Investments.
A new Russell institutional market survey, entitled Smart Beta: A Deeper Look at Asset Owner Perceptions, confirms that asset owners in North America and Europe are actively using smart beta indexes in strategic and tactical ways to pursue a variety of investment outcomes.
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Among those investors managing more than US$10 billion (35% of those surveyed), smart beta indexes are being sought more for their investment utility, helping to achieve broader portfolio objectives such as risk reduction and return enhancement, than for basic cost savings.
And across North America and Europe, asset owners’ use of smart beta indexes and smart beta index-based investment strategies is diverse, from use as market benchmarks to tools to control unwanted exposures or to emphasize certain investment factors in global multi-asset portfolios.
Conducted in the first quarter by Russell’s index business, the study focuses exclusively on institutional asset owners in North America and Europe. It included input from nearly 200 equity investment decision makers across a broad spectrum of pension plans, endowments and foundations of different asset sizes, regions and in different stages of their evaluation and adoption of smart beta.
The goal of the survey was to gain a better understanding of the perceptions and levels of adoption of smart beta strategies within these important investor populations.
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By GlobalDataKey findings include:
Broad adoption and strong interest in smart beta indexes among asset owners, especially among the largest (US$10 billion plus in assets)
- 88% of respondents with more than US$10 billion in assets have evaluated smart beta or plan to do so in the next 18 months; 77% of respondents with assets between US$1 billion and US$10 billion, and 50% of those with assets under US$1 billion responded similarly.
- 32% of asset owners currently have smart beta allocations. For asset owners who currently have smart beta allocations, 53% expect to increase their allocation and only 5% plan to reduce it in the next 18 months.
- For asset owners currently evaluating smart beta, or planning to evaluate its use in the next 18 months, 76% expect to make an allocation.
Smart beta indexes being used primarily to pursue investment outcomes
- Risk reduction and return enhancement ranked at the top of the list of investment objectives that motivated respondents’ evaluation of smart beta strategies, with over 60% of asset owners in North America and Europe attributing their evaluation to each of these two investment objectives. The greatest unmet need cited by asset owners is for smart beta indexes that help control factor exposures.
- Cost savings, cited just 15% of the time, ranked at the bottom of the list of motivating factors.
- Low-volatility and fundamentally weighted index strategies dominate on asset owners’ radar globally, but there are large regional differences in which strategies are more popular and how they are used. For example, asset owners in the U.S. and the UK were most interested in fundamentally weighted index strategies, while in Canada and Europe ex-UK, volatility-control indexes were most popular among asset owners.
There is no agreement on "name" and smart beta definitions vary by region and asset size
- In North America, the most popular name was "alternatively weighted indexes" (33% of survey respondents preferred this name) while, in Europe, "smart beta" is the preferred name (35% of respondents).
- When segmented by size, "alternatively weighted indexes" is most popular among owners of assets under $1 billion, "smart beta" and "alternatively weighted indexes" are essentially tied among owners of assets between $1 billion and $10 billion, and "smart beta" wins among owners of assets exceeding $10 billion.
Rolf Agather, managing director of global index research and innovation for Russell Investments, said: "Our survey confirms that we’ve clearly reached a new stage in the evolution of investment management. Smart beta indexes and investment strategies are gaining traction among asset owners because these highly sophisticated investors are finding value in their investment outcomes and characteristics. However, effectively integrating smart beta strategies within a broader portfolio requires that an asset owner maintain standards of assessment and ongoing review similar to those associated with any active strategy. The results of our survey underscore that asset owners’ growing interest in and adoption of smart beta strategies has driven the need for additional information, education and advice."
