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Institutional investors turn to smart beta indices for investment utility, says Russell survey

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Institutional investors are turning to smart beta indexes for their investment utility, helping to achieve broader portfolio objectives such as risk reduction and return enhancement more than basic cost savings. 

That’s according to a new survey from Russell Investments, which reveals that this is especially true among those managing more than USD10 billion (35% of those surveyed).

In Canada, almost all (95%) of institutions surveyed believe investment strategy is an appropriate application for smart beta, compared to 70% among non-Canadian responders. Furthermore, nearly a third (30%) of Canadian plans are currently evaluating smart beta strategies, compared to 11% of non-Canadian respondents.

Institutional investors may debate what to call alternatively weighted or factor-based indexes, but adoption among the largest institutional investors is clearly strong, growing and broad-based according to a new Russell global institutional market survey, entitled Smart Beta: A Deeper Look at Asset Owner Perceptions. The survey, fielded earlier this year, confirms that institutional investors in North America and Europe are actively using smart beta indexes in strategic and tactical ways to pursue a variety of investment outcomes.

Across North America and Europe, institutional investor use of smart beta indexes and smart beta index-based investment strategies is diverse, from use as market benchmarks to tools to controlling unwanted exposures or for emphasising certain investment factors in global multi-asset portfolios.

The survey, conducted in the first quarter by Russell's index business, focuses exclusively on institutional investors in North America and Europe. It included input from nearly 200 equity investment decision makers across a broad spectrum of pension plans, endowments and foundations of different asset sizes and regions and in different stages of their evaluation and adoption of smart beta.

Of the 181 survey respondents, twenty-four (13%) were Canadian investors. Of the Canadian respondents, 80% have assets greater than USD1 billion and 20% have assets above USD10 billion, and 80% have defined benefit plans. The goal of the survey was to gain a better understanding of the perceptions and levels of adoption of smart beta strategies within these important investor populations.

"Our survey confirms that we've clearly reached a new stage in the evolution of investment management. Smart beta indexes and investment strategies are gaining traction among asset owners because these highly sophisticated investors are finding value in their investment outcomes and characteristics," said Rolf Agather, managing director of global index research and innovation for Russell Investments. "However, effectively integrating smart beta strategies within a broader portfolio requires that investors maintain standards of assessment and ongoing review similar to those associated with any active strategy."

Added Greg Nott, chief investment officer for Russell Investments Canada Ltd, says: "Indicative of the current pension landscape in Canada, survey findings indicate that Canadian investors are most interested in smart beta indexes for volatility control and risk reduction. The results of this new survey reinforce that institutional investors' growing interest in and adoption of smart beta strategies has driven the need for additional information, education and advice on how to best implement these strategies."

Other key findings include:

Broad adoption and strong interest in smart beta among institutional investors, especially among the largest (USD10 billion plus in assets) and especially in Canada

• Almost a third (30%) of Canadian respondents are currently evaluating smart beta strategies, compared to 11% of non-Canadian respondents.

• 88% of all survey respondents with more than USD10 billion in assets have evaluated smart beta or plan to do so in the next 18 months; 77% of all respondents with assets between USD1 billion and USD10 billion, and 50% of those with assets under USD1 billion responded similarly.

 • 32% of all survey respondents currently have smart beta allocations and, of these, 53% expect to increase their allocation and only 5% plan to reduce it in the next 18 months.

 • For survey respondents currently evaluating smart beta, or planning to evaluate its use in the next 18 months, 76% expect to make an allocation.

Smart beta indexes being used primarily to pursue investment outcomes, with Canadian respondents gravitating toward low-volatility strategies

 • Risk reduction and return enhancement ranked at the top of the list of investment objectives that motivated all survey respondents' evaluation of smart beta strategies, with more than 60% attributing their evaluation to each of these two investment objectives. The greatest unmet need cited by survey respondents is for smart beta indexes that help control factor exposures.

 • Cost savings, cited just 15% of the time, ranked at the bottom of the list of motivating factors.

 • Low-volatility and fundamentally weighted index strategies dominate on institutional investors' radar globally, but there are large regional differences in which strategies are more popular and how they are used. For example, all of the Canadian respondents who are currently using smart beta indexes are using low-volatility strategies, versus less than half (48%) of non-Canadian respondents using these strategies. And 86% of those Canadian investors surveyed who are evaluating smart beta indexes are evaluating low-volatility strategies, compared to 64% outside Canada.

 • Among Canadian investors surveyed, risk reduction was cited 86% of the time as an objective leading to evaluation of smart beta strategies, while return enhancement was cited 43% of the time. This compares to 59% for risk reduction and 65% for return enhancement among non-Canadian respondents.

There is no agreement on "name," and smart beta definitions vary by region and asset size

 • In North America, the most popular name was "alternatively weighted indexes" (33% of survey respondents preferred this name) while, in Europe, "smart beta" is the preferred name (35% of respondents).

 • When segmented by size, "alternatively weighted indexes" is most popular among owners of assets under USD1 billion, "smart beta" and "alternatively weighted indexes" are essentially tied among owners of assets between USD1 billion and USD10 billion, and "smart beta" wins among owners of assets exceeding USD10 billion.

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