Global professional services company Towers Watson’s institutional investor clients made over twice as many new investments in smart beta strategies during 2013, approximately US$11 billion across over 180 portfolios, compared to the year before (approximately US$5 billion across almost 130 portfolios), according to company data.
Towers Watson’s clients globally have now allocated over US$32 billion to smart beta strategies to almost 500 portfolios, across a range of asset classes.
Craig Baker, global head of investment research at Towers Watson, said: "It is no surprise that smart beta strategies are being implemented at this rate, given their inherent relevance for most institutional investors. Interestingly, it has taken some time to get to this point, given that we started developing the concept in 2000 as part of our work on structured alpha, then in more detail in 2002, as beta prime. While it’s satisfying that our clients have been able to benefit first from a range of smart beta strategies, we are somewhat concerned about the proliferation of products now on the market that claim to be smart beta, particularly in the equity area."
The data also show that, last year, Towers Watson’s clients — which include pension funds, sovereign wealth funds and insurance companies — carried out alternative asset class selections worth more than four times as much (over US$12.5 billion) as they did five years ago.
Among alternatives, real estate attracted the most interest (over US$4 billion), where one-quarter is in smart beta, followed by direct hedge funds (over US$3 billion) and infrastructure (over US$2 billion), where one-third was in smart beta strategies. In the same period, direct private equity attracted approximately US$1.5 billion, while illiquid credit (distressed debt and lending) attracted roughly US$1 billion in assets.
Baker added: "Throughout the past five years, the alternative fund managers that we have put into client portfolios have shown their ability to adapt to the changing environment to generate good net-of-fees performances. Larger institutional funds are likely to continue investing in funds directly for most alternative asset classes rather than via funds of funds, as investors continue to focus on better fee structures, greater transparency and smart beta options. Indeed, there were only three fund of hedge funds mandate selections in 2013, which demonstrates this point."
According to the data, bond selections by Towers Watson’s clients in 2013 totaled US$22 billion, of which the majority were invested in global (approximately US$11 billion) and U.S. (roughly US$5 billion) mandates, followed by emerging-market mandates (approximately US$3 billion). In 2013, the total number of multi-region bond selections exceeded the combined total of all single-region bond mandates.
Baker added: "These figures confirm a longer-term trend of investors seeking greater efficiency, diversification and diversity in bond mandates, for example, favoring global solutions over a home-market bias, and an increasing acceptance of alternative credit asset classes into the strategic asset mix."
In equities, global mandates (totaling approximately US$10 billion) continued to be the most popular with Towers Watson’s clients in 2013, followed by U.S. equity (roughly US$3 billion), global ex-U.S. equity and U.S. small/mid-cap equity mandates (each approximately US$2 billion). In total, equity mandate selections last year accounted for approximately US$24 billion in assets.
Baker added: "These figures confirm an established trend of investors investing away from local markets as they seek to diversify their portfolios more globally. Interestingly, the number of equity smart beta mandates doubled in 2013, and tripled in size of assets, compared to the year before."
Manager selection activity globally at Towers Watson exceeded 920 selections in 2013, reflecting around US$79 billion of assets moved for approximately 300 clients. This compares to assets moved of roughly US$68 billion, for approximately 690 selections, five years ago.