After spending five years researching global institutional asset owners’ evaluation and adoption of smart beta index-based investment strategies, FTSE Russell is able to not only reconfirm the long-term growth in its awareness and usage, but also highlight recent trends that continue to emerge. Surveying 185 asset owners across North America (54%), Europe (31%), Asia Pacific (11%) and other regions (4%), our newly released 2018 findings offer unique insight on how the preferences and needs of global asset owners are changing.
It’s no debate that smart beta has arrived in global investment portfolios, with 91% of asset owners reporting either an existing allocation or plans to evaluate a smart beta strategy in the next 18 months. This is a notable increase from 2014 when the survey was first fielded and only 75% of asset owners reported an existing allocation or were considering implementation. And similar to previous years’ results, the top three most commonly reported objectives for using smart beta are for return enhancement (61%), risk reduction (56%), and improved diversification (39%).
Among the global asset owners surveyed this year, multi-factor combination smart beta strategies were used by 49%, rising significantly from 20% when the strategy was first highlighted in the 2015 survey. Furthermore, 87% of those who have implemented a smart beta strategy for the first time within the last two years are using a multi-factor combination. This dramatically illustrates a growing awareness of the diversification, downside protection, and return potential of combining factors – something we’ve also witnessed during our many discussions with clients. By contrast, fundamentally-weighted strategies have steadily decreased in use from 41% in 2014 to 19% in 2018.
Though still a relatively new entry into our annual survey, smart beta indexes that incorporate environmental, social & governance (ESG) considerations continue to rise in popularity. Nearly 40% of respondents anticipate applying ESG considerations to a smart beta index-based investment strategy in the next 18 months. Among those, 63% are motivated by societal good, a shift from last year’s top driver of avoiding long-term risk (now 54%). However, asset owners also reported performance (44%) as a top reason for consideration, up 13% since last year when ESG smart beta i awareness and usage was first measured.
Despite the strong growth in adoption these findings reveal, educational shortfalls still remain. The largest barrier keeping investors from making a smart beta allocation is determining the best strategy (or combination of strategies) for a portfolio. Almost half of those surveyed cited this as their top concern, underscoring the importance and continued need for further research, education, and product innovation to meet the needs of asset owners.
To learn more about the background and methodology or view this year’s full results, request a full copy of the Smart beta: 2018 global survey findings from asset owners.