05.21.2018

Smart Beta Allocations Increase

  • In 2018, 91% of asset owners globally have a smart beta investment allocation, have evaluated or are planning to evaluate smart beta in the next 18 months
  • Survey shows a 16% increase in implementation or consideration over past five years, yet more than 50% of asset owners in the US & UK remain uncertain on the best approach
  • Use of multi-factor combination smart beta index-based investment strategies by global asset owners has more than doubled since first measured in 2015
  • Nearly 40% of global asset owners anticipate applying ESG to a smart beta strategy in the next 18 months – nearly half for performance reasons
  • Total assets under management of survey participants estimated at $3.5 trillion globally

FTSE Russell, a leading global index and data provider, today published results from its fifth annual global institutional asset owner smart beta survey. The report provides insight into the major trends over recent years around awareness, popularity and use of smart beta index-based investment strategies by the global institutional investor community.

Rolf Agather, Managing Director of North America Research, FTSE Russell, said: “With five years of results for our global smart beta survey, we are able to offer unique insight across the industry on how the preferences and needs of our global clients are changing. While some results from this year’s survey serve to reconfirm long-term growth in awareness and usage of smart beta indexes, others highlight areas that are continuing to emerge. Notably, awareness and usage of multifactor and ESG smart beta indexes are growing in recent years. And our survey notes some differences between investors across markets, specifically the US, UK and Canada.”

Strong Growth Drives Need for Education

FTSE Russell’s survey found a 16% increase in smart beta implementation or consideration over the last five years, yet also found that asset owners remain uncertain on how to best implement smart beta into their investment strategies.

In 2018, 91% of asset owners globally have a smart beta investment allocation, have evaluated or are planning to evaluate this topic in the next 18 months. This is a notable increase from 2014 when the survey was first fielded, where 75% of asset owners had a smart beta allocation, evaluated or were planning to evaluate smart beta. Yet despite a very strong growth in adoption, educational shortfalls remain. Among the top three barriers to entry was how to determine the best strategy (or combination of strategies) for smart beta implementation with more than 50% of those surveyed citing this as an issue in the US and the UK.

Combination Proliferation

Among global asset owners surveyed in 2018, multi-factor combination smart beta strategies were used by 49%, a notable rise from 20% when first measured in 2015. Furthermore, 70% of asset owners are currently evaluating multi-factor combination smart beta strategies, far surpassing all other strategies. Notably, asset owners in the US and the UK are showing more interest in multi-factor smart beta index-based strategies yet, again lack of education was cited as a major barrier to implementation. However, amid the rapidly growing interest in multi-factor combination smart beta strategies, asset owner interest in fundamentally weighted strategies has declined. In 2018, 19% of global asset owners surveyed with an existing smart beta allocation are using these strategies, down from 41% usage when first measured in 2014.

Putting the “P” in ESG

Though a relatively new entry into FTSE Russell’s annual survey, smart beta indexes measuring environmental, social & governance (ESG) factors are clearly on the rise. Nearly 40% of asset owners surveyed anticipate applying ESG considerations to a smart beta strategy in the next 18 months. And, notably, asset owners are looking to ESG index-based strategies for performance reasons and not just asset allocation or societal good. In 2018, 44% of asset owners surveyed were considering ESG for performance reasons, a 13% increase from 2017 when ESG smart beta index awareness and usage was first measured.

Survey background and methodology:

FTSE Russell’s fifth annual global institutional smart beta survey was conducted in January and February 2018 among 185 global asset owners. The sample covers a broad mix of organization types – government organizations (36%); corporations or private businesses (20%); non-profit organizations or universities (15%) and unions or industry-wide pension schemes (10%) – with the rest a mix of insurance companies, sovereign wealth funds, healthcare organizations and family offices.

67% of survey respondents manage defined benefit plan assets, 36% manage defined contribution plan assets and 15% manage endowment or foundation assets. Respondents come from North America (54%), Europe (31%), Asia Pacific (11%) and other regions (4%). Respondents are, by AUM tiers, asset owners with under $1B in AUM (20%); those with between $1B and $10B in AUM (39%); and those with $10B or more in AUM (41%). Total AUM of the survey participants is estimated to be over $3.5 trillion globally.

Source: FTSE Russell

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