‘Smart’ Beta Reaches a Turning Point

Shanny Basar

FTSE Russell, the index business owned by the London Stock Exchange Group, said the use of smart beta indexes among global institutional asset owners has reached a turning point.

Tom Goodwin, senior research director, told Markets Media: “Three years ago consultants were sceptical of smart beta but there has been a growing acceptance and the market has reached a turning point.”

Smart beta strategies do not follow a standard market cap-weighted index but instead follow indexes based on factors, such as momentum, quality, size, and value. Goodwin said since 2008 investors have wanted lower volatility and more downside protection and cost savings have also become more important this year.

The third annual FTSE Russell survey found that 36% of asset owners are currently evaluating smart beta, more than double 15% in the first survey in 2014. In addition, 62% of asset owners with an existing smart beta allocation are evaluating additional allocations.

The study was conducted in January and February this year with 253 asset owners with total assets of more than $2 trillion. The sample ranged from asset owners with insurance general accounts, sovereign wealth funds and other types of institutional entities to corporations or private businesses, government organizations and unions or industry-wide pension schemes.

Goodwin said the strongest growth in smart beta adoption is among asset owners with less than $1bn in assets. The survey also showed that asset owners using five or more smart beta indexes increased significantly to 21% this year from just 2% in 2014.

“Any one factor can have an extended period of underperformance so multiple factors add diversification,” added Goodwin.

The survey said that while low-volatility and value factor indexes still lead in asset owner implementation, adoption of multi-factor combination indexes has nearly doubled in the last year and is now a close third. “And close to 70% of asset owners take a long view on smart beta, planning to use smart beta indexes five years or longer to help achieve investment objectives,” added the report.

This month BlackRock’s iShares business, which manages exchange-traded funds, projected that smart beta ETF assets will reach $1 trillion globally by 2020 and $2.4 trillion by 2025.

BlackRock said in a statement: “With current smart beta ETF assets at $282bn, this reflects an annual organic growth rate of 19%, double the growth rate of the overall ETF market. Minimum volatility and factor (multi and single) funds are expected to be key drivers of future growth and represent over 60% of new smart beta flows through 2025.”

Andrew Ang, head of factor investing strategies at BlackRock, said in a statement: “The rise of smart beta – propelled by advances in technology and data analytics – is helping to democratize factor investing, putting investment solutions once only accessible to large institutions within the reach of all investors.”

Last week Stoxx, the operator of Deutsche Börse Group’s index business, grew its family of smart beta indices to combine investment themes such as low-carbon and ESG with low volatility, high dividend and low correlation screens, thus creating hybrid index concepts.

Matteo Andreetto, chief executive of Stoxx Limited, said in a statement: “By extending our suite of smart beta indices, we are again at the forefront of innovation with regard to major investment trends. They are an important extension of our sustainable index offering, which includes several other indices such as the Stoxx Global Climate Change Leaders Index or the Stoxx Global ESG Leaders Index.”

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