The adoption of smart beta indices among institutional investors is growing and becoming more broad-based, with European asset owners continuing to lead their North American counterparts when evaluating and implementing new strategies, according to a FTSE Russell survey.
The FTSE Russell Smart Beta: 2015 Global Survey Findings from Asset Owners survey found a significantly increased interest in, and adoption of, multiple smart beta indices among institutional investors around the world, and highlights the importance of ongoing education and information surrounding the myriad of smart beta index methodologies available in the market and how these approaches can work in combination.
Smart beta indexes, said Rolf Agather (pictured), managing director of North America research for FTSE Russell in a statement, have given asset owners and their consultants more choice and greater flexibility in the tools available for constructing portfolios with an outcome-oriented focus.
“But increases in choice and flexibility mean that investors require more information as they work to make their decisions. Institutional asset owners are increasingly using more smart beta indexes and in a variety of new ways,” he said. “This is outstanding for the industry, but reinforces the need for further education, information and advice.”
According to the report, there has been a significant increase in smart beta allocation in a relatively short period of time. In 2014, 38% of the survey respondents with an allocation to smart beta strategies had allocated 10% or more of their organisation’s equity portfolio to smart beta strategies. In 2015, more than half (55%) of survey respondents are allocating more than 10% to smart beta strategies.
In addition, the number of asset owners using multiple smart beta strategies has grown. In 2014, 59% of the asset owners responding to the survey were using more than one strategy; in 2015, 71% are now using more than one strategy, and 22% of those respondents are using four or more strategies. These differences highlight a growing allocation to smart beta strategies and the survey also reveals movement toward combining multiple factor and strategy indexes.
Competition is fierce and index providers are all tapping into a trend that is not a fad, but something that is here to stay as part of investor’s portfolios for years to come, said Altaf Kassam, managing director and head of equity applied research, Europe, Middle East, Africa and India (EmeaI) for MSCI which launched a series of Diversified Multi-Factor Indexes in March.
“Factor indexes are a complement of our core market cap index range,” he said. “At the moment, these indexes are rapidly growing and they represent around 1% of the asset under management linked to our market cap indexes. We see them as a very important element of our offering for ETF providers and asset managers.”
According to Kassam, indexes that have an FX hedge and other overlays have been popular among ETF providers and investors. “These products are appealing, for example, to US investors that want to invest in Europe without being exposed to the decline of the Euro - so they have the possibility of buying Europe but hedged into US dollars,” said Kassam. “Similarly, clients that want to invest in Japan can now get exposure to Japan underlying investments which are FX hedged.”
There are over 500 structured products linked to smart beta indices across markets with the US market accounting for the biggest portion of products linked to these strategies at a country level, followed by Finland, Ireland, and Italy.
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