The first iteration of “smart beta” can be traced to the 1980s through cap and style distinctions, there is no denying that as an investment tool, the smart beta approach has arrived and will continue to transform and impact the investment landscape. Today, “smart beta” is a term often used to define a broad range of investment strategies that are generally categorized by two types of exposures: strategy-based and factor-based.
Strategy-based exposures have gained a lot in popularity over the past few years. They are typically non-cap weighted, such as equal-weight or fundamentalweight indexes. Factor-based exposures seek to achieve a systematic source of return by capturing similar factor characteristics, such as momentum or low volatility. Passively managed products based on these smart beta indexes offer investors new ways to tailor their exposures to specific market segments, portfolio risk and investment beliefs.
As a follow-up to the well-received 2014 survey, FTSE Russell conducted a second survey of institutional asset owners in 2015, in order to better understand the progression in perceptions and adoption of smart beta globally. As in the 2014 survey, we intentionally recruited equity decision makers from across a broad spectrum of AUM size and at a variety of stages in their evaluation of smart beta. We have prepared this report to offer further insights into the growing acceptance of smart beta and key considerations for investors as they evaluate these strategies and incorporate them in their portfolios.
One set of questions we did not repeat this year concerned the preferred name for what is called “smart beta.” A number of alternative names have been suggested, but none have been broadly embraced. One problem with the proposed alternatives is that they tend to be too narrowly defined, such as “factor indexes” or “non-price-weighted indexes.” “Smart beta” encompasses a wide and growing range of systematic strategies and exposures that call for a broad label. To address one common objection to the name, we should all agree that the “smart” in “smart beta” does not imply that investors in traditional cap-weighted index funds are doing something ill-advised. We should also agree that the naming debate distracts from the real need for investor education. Our focus should be on the substance of these strategies, not the name.
While we need to be cautious about inferring meaningful trends, there were some interesting differences in the results of the 2015 survey versus the 2014 version. In 2014, 40% of the survey respondents with an allocation to smart beta had allocated 5% or less. In 2015, only 24% have allocated 5% or less; 55% have allocated more than 10% to smart beta strategies. Another interesting difference is in the number of asset owners using multiple smart beta strategies. In 2014, 59% of the asset owners responding to our survey were using more than one strategy; in 2015, 71% are using more than one strategy, and 22% of those respondents are using four or more strategies. These differences highlight not only a growing allocation to smart beta strategies, but also a movement toward combining multiple factor and strategy indexes.
The results of our new survey demonstrate increased interest in and adoption of smart beta strategies among institutional asset owners and underline the need for further education, information and advice. Smart beta indexes have given asset owners and their consultants more choice and greater flexibility in the construction of portfolios with an outcome-oriented focus. But increases in choice and flexibility mean that investors require all the more information as they work to make the right decisions. We hope the results of this survey provide some measure of insight for all investors evaluating smart beta strategies.
— Download the complete paper —