Nearly half of all asset owners now using smart beta: FTSE Russell survey

May 23rd, 2017 | By | Category: Equities

Nearly half of all asset owners now have an allocation to smart beta, according to the latest annual smart beta survey from index provider FTSE Russell. Forty-six percent of asset owners now use smart beta, marking the highest adoption rate since the survey’s inception in 2014. This is up from 36% in 2016 and 26% in 2015, with a further 25% currently evaluating smart beta but with no allocation at present.

Smart beta usage continues to grow reports FTSE Russell

Europe is leading the way in smart beta adoption with 60% of respondents having a smart beta allocation compared to 37% of respondents in North America.

The survey reflects trends seen in the exchange-traded funds industry, where smart beta equity assets have increased by more than 30% over the past year to well over $500 billion.

The outlook for smart beta continues to look positive, with 76% of respondents planning to increase their allocation within the next 18 months.

Risk reduction and return enhancement continue to be the most common reasons for smart beta use (55% and 52% respectively), followed by diversification (44%), cost savings (32%), specific factor exposure (30%) and income generation (13%).

Multi-factor strategies are now the most widely used form of smart beta, with 64% of respondents currently having an allocation, up from 37% in 2016. Low volatility and value are the next most widely used (47% and 34% respectively), followed by fundamentally weighted (26%), quality (21%), momentum (16%), risk parity (12%), dividend/income (10%), maximum diversification (10%), minimum variance (9%) and equal weight (6%).

Recent adopters of smart beta chose to implement multi-factor and quality strategies in greater proportions to early adopters. Those who have had a smart beta allocation for over two years tend to favour fundamentally weighted and low-volatility strategies.

In addition to the growing breadth of smart beta adoption, the depth of adoption is also increasing, with 63% of existing users evaluating additional allocations to smart beta, and 50% of those who had previously decided not to implement smart beta strategies currently re-evaluating.

Of those respondents evaluating smart beta again, 75% reported that it was due to increased understanding through new information and understanding, and 67% reported that it was due to new types of smart beta strategy becoming available. Only 17% of respondents reported that their re-evaluation was due to cost savings.

Adoption growth was widely observed in North America, Europe and Asia Pacific, with Europe leading the way with 60% of asset owners with a smart beta allocation compared to 48% in Asia Pacific and 37% in North America.

Over the past year, the strongest adoption rate gains were seen among asset owners with $1-10 billion in assets under management (AUM), jumping to 57% from 32% in 2016. This is compared to 50% for those with over $10bn AUM (46% in 2016) and just 19% for those with under $1bn AUM (26% in 2016).

No decisive trend was seen around where the funds for new smart beta allocations originate from, with 34% coming from active equity, 35% coming from active and passive equity, 27% coming from passive equity and 4% coming from new money.

Strategic implementation was the most common use of smart beta with 70% of those surveyed having long-term allocations, compared to 27% with both tactical and strategic allocations and just 3% using only tactical implementations.

Interest in applying ESG considerations to smart beta strategies is mixed, with 60% of asset owners in Europe anticipating taking this step compared with only 20% in North America.

The survey was conducted in January and February 2017 and includes responses from 194 asset owners with the majority of participants drawn from North America (43%), Europe (32%) and Asia Pacific (19%). A wide mix of organisations is represented including government organisations (23%), non-profit or universities (17%), corporations or private businesses (15%), and unions or industry-wide pensions schemes (11%). The rest is a mix of insurance companies, sovereign wealth funds, health care organisations and family offices.

Fifty-six percent of survey respondents manage defined benefit plan assets, 36% manage defined contribution plan assets and 18% manage endowment or foundation assets. Respondents also included asset owners with insurance general accounts, sovereign wealth funds and other types of institutional entities.

In terms of the assets under management of respondents, 19% have under $1bn, 34% have $1-10bn and 47% have more than $10bn. The total AUM of survey participants is estimated to be over $2 trillion.

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