Asset owners in North America and Europe are actively using smart beta indexes strategically and tactically to achieve investment objectives, new research shows.

Russell Indexes conducted the institutional market survey (“Smart Beta: A Deeper Look at Asset Owner Perceptions) for investors considering the use of smart beta strategies in their portfolios. Survey participants included 181 asset owners with at least $200 million in AUM in the United States, Canada, Europe and the Middle East.  

Investors managing more than $10 billion (35 percent of those surveyed) are seeking smart beta indexes more for their investment utility, ability to reduce risk and enhance returns than for cost savings. Across North America and Europe, asset owners use smart beta indexes and smart beta index-based investment strategies as benchmarking tools to control unwanted exposures or to emphasize certain investment factors in global multi-asset portfolios.

The survey reveals these findings:

  • Almost 90 percent (88 percent) of respondents with more than $10 billion in assets have evaluated smart beta or plan to do so in the next 18 months; 77 percent of respondents with assets between $1 billion and $10 billion, and 50 percent of those with assets under $1 billion responded similarly;
  • Nearly one-third (32 percent) of asset owners currently have smart beta allocations. For asset owners who currently have smart beta allocations, 53 percent expect to increase their allocation and only 5 percent plan to reduce it in the next 18 months;
  • For asset owners currently evaluating smart beta, or planning to evaluate its use in the next 18 months, 76 percent expect to make an allocation;
  • Risk reduction and return enhancement ranked at the top of the list of investment objectives that motivated respondents’ evaluation of smart beta strategies, with more than 60 percent of asset owners in North America and Europe attributing their evaluation to each of these two investment objectives. The greatest unmet need cited by asset owners is for smart beta indexes that help control factor exposures;
  • Cost savings, cited just 15 percent of the time, ranked at the bottom of the list of motivating factors;
  • In North America, the most popular name was “alternatively weighted indexes” (33 percent of survey respondents preferred this name) while, in Europe, “smart beta” is the preferred name (35 percent of respondents); and
  • When segmented by size, “alternatively weighted indexes” is most popular among owners of assets under $1 billion, “smart beta” and “alternatively weighted indexes” are tied among owners of assets between $1 billion and $10 billion, and “smart beta” wins among owners of assets exceeding $10 billion.

“Smart beta indexes and investment strategies are gaining traction among asset owners because these highly sophisticated investors are finding value in their investment outcomes and characteristics,” says Rolf Agather, managing director of global index research and innovation for Russell Investments. “However, effectively integrating smart beta strategies within a broader portfolio requires that an asset owner maintain standards of assessment and ongoing review similar to those associated with any active strategy,” he adds. “The results of our survey underscore that asset owners’ growing interest in and adoption of smart beta strategies has driven the need for additional information, education and advice.”

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