Towers Watson’s clients made over twice as many new investments in smart beta strategies during 2013, around USD11bn across over 180 portfolios, compared to the year before, according to global data from the company.
Towers Watson’s institutional investment clients globally have now allocated over USD32bn to smart beta strategies to almost 500 portfolios, across a range of asset classes.
Craig Baker, global head of investment research at Towers Watson, says: “It is no surprise to us that smart beta strategies are being implemented at this rate, given their inherent relevance for most institutional investors. Interestingly it has taken some time to get to this point given that we started developing the concept in 2000 as part of our work on structured alpha, and then in more detail in 2002 as beta prime. While it is satisfying that our clients have been able to benefit first from a range of smart beta strategies, we are somewhat concerned about the proliferation of products now on the market that claim to be smart beta, particularly in the equity area.”
The data also shows that last year Towers Watson’s clients – which include pension funds, sovereign wealth funds and insurance companies – carried out alternative asset class selections worth more than four times as much (over USD12.5bn) than they did five years ago. Among alternatives, during 2013, real estate attracted the most interest (over USD4bn), where one quarter is in smart beta, followed by direct hedge funds (over USD3bn), followed by infrastructure (over USD2bn) where one third was in smart beta strategies. In the same period, direct private equity attracted around USD1.5bn, while illiquid credit (distressed debt and lending) attracted about USD1bn in assets.
Baker says: “Throughout the past five years the alternative fund managers that we have put into client portfolios have shown their ability to adapt to the changing environment to generate good net-of-fees performances. Larger institutional funds are likely to continue to invest in funds directly for most alternative asset classes rather than via funds of funds as investors continue to focus on better fee structures, greater transparency and smart beta options. Indeed, there were only three FoHF mandate selections in 2013, which is a demonstration of this point.”
According to the data, bond selections by Towers Watson’s clients in 2013 totalled USD22bn, of which the majority were invested in global (around USD11bn) and US (around USD5bn) mandates, followed by emerging market mandates (around USD3bn). In 2013, the total number of multi-region bond selections exceeded the combined total of all single-region bond mandates.
Baker says: “These figures confirm a longer-term trend of investors seeking greater efficiency, diversification and diversity in bond mandates, for example favouring global solutions over a home market bias and an increasing acceptance of alternative credit asset classes into the strategic asset mix.”
In equities, global mandates, totalling around USD10bn, continued to be the most popular with Towers Watson's clients in 2013, followed by US equity (around USD3bn), Global ex US equity and US small / mid cap equity mandates (each around USD2bn). In total, equity mandate selections last year accounted for around USD24bn in assets.
Baker says: “These figures confirm an established trend of investors investing away from local markets, as they seek to diversify their portfolios more globally. Interestingly the number of equity smart beta mandates doubled in 2013, and tripled in size of assets, compared to the year before.”