Investors Using Smart Beta in Many Ways

Smart Beta: A Deeper Look at Asset Owner Perceptions finds among those investors managing more than $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—rather 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.

Risk reduction and return enhancement ranked at the top of the list of investment objectives that motivated respondents’ evaluation of smart beta strategies, with more than 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.

Eighty-eight percent of respondents with more than $10 billion in assets have evaluated smart beta or plan to do so in the next 18 months; 77% of respondents with assets between $1 billion and $10 billion, and 50% of those with assets under $1 billion responded similarly.

Thirty-two percent 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.

The survey found there is no agreement on naming, 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 less than $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.

“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,” says Rolf Agather, managing director of global index research and innovation for Russell Investments, based in Seattle. "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.”

The survey was conducted between January 22 and February 20. Survey participants included 181 asset owners with at least $200 million in assets under management in the United States, Canada, Europe, and the Middle East 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.

More information about the survey can be requested here.