But educational barriers, including how to determine the best strategy, remain
FTSE Russell has published findings from its fifth annual survey of institutional asset owners concerning smart beta. The study examined major trends around awareness, popularity and use of smart-beta index-based strategies among global institutional investors.
The study found a 16% increase in smart-beta implementation among asset owners over the past five years; the percentage of those who had a smart-beta investment allocation, had evaluated the topic, or are planning to evaluate it rose from 75% in 2014 to 91% in 2018.
Among those who already have smart-beta strategies, two-thirds said they were considering increasing their allocations. Meanwhile, 37% of those who had evaluated smart-beta strategies and decided not to implement were reportedly re-evaluating their choices; most cited “new developments in smart beta strategies as well as increased availability of off-the-shelf smart beta investment products”.
Despite the growing attention for the strategies, the study found a persistence of educational shortfalls. The top barrier was how to determine the best strategy (or combination of strategies) for smart-beta implementation, which 45% of those surveyed cited as an issue. Respondents also cited unintended factor biases (36%) and capacity issues — the concern that growth in smart-beta investing may erode these strategies’ future returns (33%).
The study also found a notable rise in the use of multi-factor combination smart-beta strategies, from 20% of institutions in 2015 to 49% in 2018. The strategies were also by far the most effective in capturing institutional interest, with 70% of asset owners evaluating them — a far higher percentage than that for other strategies — though lack of education has kept many from implementing them.
Asset owners’ interest in fundamentally weighted strategies has also decreased, with only 19% of global asset owners surveyed saying they had an existing smart-beta allocation in 2018 compared to 41% in 2014.
Despite being a relatively new entry in the company’s annual survey, nearly 40% of asset owners surveyed said they foresee themselves having to apply ESG considerations to a smart-beta strategy in the next 18 months. Almost 40% of all asset owners are reportedly also expecting to apply ESG considerations to a smart-beta strategy within the next 18 months.
Performance is also a growing concern for ESG strategies. Some 44% of asset owners surveyed were thinking about considering ESG for performance reasons — up 13% from 2017 when ESG smart-beta awareness and usage was first measured.
