FTSE Russell is proud to present the fifth annual survey of global institutional asset owners’ attitudes toward evaluation and adoption of smart beta. Each year we have surveyed decision makers across a broad spectrum of AUM tiers and organizational types at a variety of stages in their evaluation of smart beta. This year, 185 asset owners responded. Respondents are drawn from North America (54%), Europe (31%), Asia Pacific (11%) and other regions (4%), and have an estimated total AUM of over $3.5 trillion.

Over the past five years, our survey has documented global institutional asset owners’ growing interest in smart beta index-based strategies and allocations to investable products based on smart beta indexes. In the 2018 survey, 77% of survey respondents have implemented, are currently evaluating, or plan to evaluate smart beta strategies. Just 9% of survey respondents reported no existing allocation and no plans to evaluate it in the near future. In the past, asset owners with more than $10B AUM had the largest adoption rate by far. Today, adoption rates are more evenly distributed between small (39%), medium (43%) and large (56%) asset owners. Clearly, smart beta has become an important part of an industry-wide conversation.

The 2017 survey documented a strong trend in multi-factor strategy adoption. That headline continued in 2018, where multi-factor combinations accounted for the largest number of adoptions (49%), well past the second and third place single factor indexes of Low Volatility (35%) and Value (28%). 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 have witnessed during our many discussions with asset owners. By contrast, fundamentally-weighted strategies have steadily fallen in use from 41% in 2014 to 19% in 2018.

As in past surveys, risk reduction, return enhancement and improved diversification remain the top three motives for allocations to smart beta. Cost saving has remained steady in fourth place (31%), as budgetary considerations continue to play a significant role in investment planning. As a bonus this year, we also asked respondents for their opinion of factor timing: 28% believe it is possible for timing strategies to be successful.

In 2017, we initiated questions on smart beta in fixed income. Similar to last year, few asset owners have a smart beta fixed income allocation (9%) in 2018. This highlights the need for additional education and greater product choice.

Regarding ESG, a substantial number (42%) of all respondents who anticipate applying ESG considerations to a smart beta strategy are doing so because they see a compatibility of the smart beta approach with ESG. This is a theme that FTSE Russell has been emphasizing within its indexes with its tilt-tilt methodology. The greatest interest in ESG continues to be from European asset owners.

A happy customer is a repeat customer. When asked how satisfied asset owners are with their smart beta strategies, 62% said they were satisfied or very satisfied. Only 3% reported being dissatisfied, in spite of a challenging year for some strategies. So perhaps it is no surprise that 60% of those with an existing smart beta allocation are contemplating further allocations. The high satisfaction levels of current users suggest growth will continue.

Finally, the largest barrier to smart beta allocation and implementation is “How to determine the best strategy or combination of strategies for my portfolio” (45%). This underscores the continuing need for research, education and product innovation to meet the needs of asset owners. We hope the results of this survey provide a degree of insight for all market participants with an interest in smart beta.