By: Rolf Agather, managing director of research
How much higher can smart beta adoption climb? Now in its fourth year, FTSE Russell's latest annual survey of global institutional asset owners indicates that smart beta adoption is at an all time high and that investors continue to find new applications for its use.
The survey, Smart beta: 2017 global survey findings from asset owners, reveals that the percentage of asset owners reporting an existing smart beta allocation has reached a new peak of 46%, up from 36% last year. The trend over the past three years shows that increasing global growth and adoption of smart beta is continuing in 2017, with adoption of smart beta in Europe still greater than in North America and Asia Pacific, with 60% of asset owners reporting an allocation.
Smart beta usage
Source: FTSE Russell, from "Smart beta: 2017 global survey findings from asset owners."
For the last four years, we have surveyed asset owner decision makers from across a broad spectrum of AUM tiers and at a variety of stages in their evaluation of smart beta. This year, the 194 global asset owner participants are drawn from North America (43%), Europe (32%), Asia Pacific (19%) and other regions (5%) and have estimated total AUM of more than $2 trillion.
In addition to revealing a new peak in smart beta adoption for global asset owners, results from this year’s survey also detail strong interest in applying ESG considerations to smart beta, which is increasingly being referred to as smart sustainability. In both North America and Europe, interest in smart sustainability index-based strategies is strongest among the largest asset owners with AUM greater than $10 billion. Yet regional differences persist. Within this size tier, nearly 80% of asset owners domiciled in Europe anticipate applying ESG considerations to a smart beta strategy while 30% of asset owners domiciled in North America do. The survey further highlights that the primary motivations of the asset owners to use a smart sustainability index-based strategy are investment decision-led rather than driven by regulatory requirements or social goals.
Other key survey findings:
- Smart beta index adoption continues to grow Smart beta adoption rates increased from 2016 to 2017; now, nearly half of asset owners surveyed have a smart beta index allocation. Adoption growth was fed by the strong numbers of smart beta evaluators observed in 2016. Findings suggest that the pipeline of asset owners evaluating smart beta remains strong and is comprised of first-time evaluators, re-evaluators, and prior adopters who are considering adding to an existing smart beta allocation.
- Use of smart beta Return enhancement and risk reduction persist as the primary objectives expressed by those surveyed for use of smart beta. Cost savings continues to grow in importance.
- Multi-factor smart beta indexes increase in popularity This year, multi-factor smart beta combinations have become the top smart beta index construction used; they are also the most widely evaluated smart beta index. Among single factor methodologies, Value and Low Volatility are most widely used and evaluated.
- Fixed income smart beta In 2017, we introduced an analysis of smart beta evaluation and usage trends for fixed income, which is intended to grow and evolve with this nascent market. The establishment of a well-defined set of factors has not taken place yet for the debt markets, and not surprisingly, far fewer asset owners indicated they have evaluated smart beta for fixed income.
The 2017 survey demonstrates that investors are readily adopting smart beta indexes and that their approach to smart beta is growing in sophistication. Asset owners and consultants continue to increase their understanding of smart beta and are now harnessing a wider spectrum of tools available.
We expect growth in smart beta to continue at a robust pace as global asset owners continue to drive innovation and adoption of smart beta indexes.
Request a copy of the Smart beta: 2017 global survey findings from asset owners.
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