Global adoption of smart beta strategies among the largest institutional investors is strong and growing, with Europe leading North America.
A new Russell global institutional market survey, entitled Smart Beta: A Deeper Look at Asset Owner Perceptions, confirms that asset owners in North America and Europe are actively using smart beta indices in strategic and tactical ways to pursue a wide range of investment outcomes.
Survey findings show that Europe is leading North America in smart beta adoption, with 40 per cent of European respondents reporting smart beta allocations, compared to 24 per cent in North America.
However, use of smart beta indices and smart beta index-based investment strategies among European investors is broad-based. In Europe, only 15 per cent of asset owners do not expect to evaluate smart beta in the next 18 months, compared to 34 per cent in North America. Furthermore, of the asset owners managing more than USD10 billion – 35 per cent of survey participants – smart beta indices are being sought primarily for risk reduction and return enhancement more than basic cost savings.
Conducted in the first quarter by Russell’s index business, the survey focuses exclusively on institutional asset owners in North America and Europe. It included input from nearly 200 equity investment decision makers.
Rolf Agather, managing director of global index research and innovation for Russell Investments, said: “Our survey confirms that smart beta indices and investment strategies are clearly gaining traction among asset owners. However, effectively integrating smart beta strategies within a broader portfolio requires that an asset owner maintain standards of assessment and ongoing review similar to those associated with any active strategy.”
Sorca Kelly-Scholte, managing director, client strategy & research for Russell Investments Europe, says: “While it may feel at times like we have been speaking with clients for years about smart beta indices, we are still very much in the early days. Although the results of our survey confirm that outcome-oriented European investors are embracing smart beta index tools, this growth means that our clients have a greater need for insight on how to determine the best smart beta implementation strategy.”
Risk reduction and return enhancement ranked at the top of the list of investment objectives that motivated respondents’ evaluation of smart beta strategies, with over 60 per cent of asset owners in North America and Europe attributing their evaluation to each of these two investment objectives. The greatest unmet need cited by all asset owners in the survey is for smart beta indices that help control factor exposures.
Cost savings, cited just 15 per cent 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, but there are large regional differences in which strategies are more popular and how they are used. For example, asset owners in the US and the UK were most interested in fundamentally weighted index strategies, while in Canada and Europe ex-UK, volatility-control indices were most popular among asset owners.
In North America, the most popular name was “alternatively weighted indices” (33 per cent of survey respondents preferred this name) while, in Europe, “smart beta” is the preferred name (35 per cent of respondents).
When segmented by size, “alternatively weighted indices” is most popular among owners of assets under USD1 billion, “smart beta” and “alternatively weighted indices” are essentially tied among owners of assets between USD1 billion and USD10 billion, and “smart beta” wins among owners of assets exceeding USD10 billion.