Smart Beta Survey Highlights Opportunity, Need for Education

FTSE Russell published its 2018 Global Institutional Smart Beta Survey, marking the fifth annual installment of the smart beta survey.

Level-setting the conversation, FTSE Russell’s explains its use of “smart beta,” in the context of indexing, is simply meant as a “generic term for transparent, rules-based indexes that depart from the standard market capitalization weighting method in order to achieve particular objectives.” These objectives could include the generation of long-term excess index returns, the mitigation of volatility or enhanced diversification. FTSE Russell classifies these various approaches into two broad categories; alternatively-weighted (e.g. fundamental, equal or risk-weighted) and factor indexes (e.g. single or multi-factor).

According to the 2018 smart beta survey, the vast majority (91%) of institutional asset owners globally have a smart beta investment allocation, have evaluated or are planning to evaluate smart beta in the next 18 months. The survey further shows a 16% increase in implementation or consideration over past five years.

Still, there is some lingering uncertainty about the role of smart beta investing, as more than 50% of asset owners in the U.S. and United Kingdom say they remain uncertain on the best approach for their particular purposes. Other survey highlights suggest the use of “multi-factor combination smart beta index-based investment strategies” by institutional investors has more than doubled since first measured in 2015, denoting how quickly this market segment is evolving.

According to FTSE Russell, nearly 40% of global institutional asset owners anticipate applying environmental, social and governance (ESG) investing themes to a smart beta strategy in the next 18 months—nearly half for performance reasons.

Commenting on these numbers, Rolf Agather, managing director of North America Research, FTSE Russell, predicts that strong growth will drive a greater need for education and sophistication on the topic of smart beta.

“The survey shows a 16% increase in smart beta implementation or consideration over the last five years,” Agather observes, “yet it also suggests that asset owners remain uncertain on how to best implement smart beta into their investment strategies.”

Among global asset owners surveyed in 2018, multi-factor combination smart beta strategies are used by 49%, a notable rise from 20% when first measured in 2015. Furthermore, 70% of asset owners are currently evaluating multi-factor combination smart beta strategies, far surpassing all other strategies. Important to note, related research shows there is a danger of institutional investors “diluting” their smart-beta portfolio convictions by attempting to implement multiple factors without adequate consideration of the way factors and peripheral risk exposures can interact in unanticipated ways. 

“Notably, asset owners in the U.S. are showing more interest in multi-factor smart beta index-based strategies yet, again lack of education was cited as a major barrier to implementation,” the survey report states. “However, amid the rapidly growing interest in multi-factor combination smart beta strategies, asset owner interest in fundamentally weighted strategies has declined. In 2018, 19% of global asset owners surveyed with an existing smart beta allocation are using these strategies, down from 41% usage when first measured in 2014.”

The full report is available for download here.