Institutional asset owners are adopting smart beta strategies at a relatively rapid rate, with deployment reaching record levels. According to the latest FTSE Russell Global Smart Beta Survey, 48% of global asset owners are using smart beta strategies, up from 26%, 36% and 46%, in each of the previous three years.
European asset owners have embraced these strategies more than their U.S. counterparts — 61% of European asset owners use smart beta versus just 42% of U.S. asset owners — but adoptions in the U.S. have increased at a faster rate. They rose by 5 percentage points between 2017 and 2018 while they only inched higher 1% among European managers, according to the FTSE Russell survey.
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Altogether, 185 asset owners with more than $3.5 trillion in cumulative assets under management were surveyed by FTSE Russell. Slightly more than half (54%) were based in the U.S.; 31% in Europe, 11% in Asia Pacific and 4% in other areas. More than half of the asset owners surveyed (56%) had $10 billion or more in assets; 39% had less than $1 billion and 44% had between $1 and $10 billion in assets. They included government organizations, corporations or private businesses, nonprofit organizations or universities and unions or industrywide pension schemes.
About two-thirds manage defined benefit plan assets; one-third manage defined contribution plans and 15% manage endowments or foundation assets. (There is overlap.) The survey also included asset owners with insurance general accounts and sovereign wealth funds.
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Multifactor strategies are the most popular smart beta strategy, which the survey defines as an index-based investment strategy that is not traditionally market-cap weighted. Forty-nine percent of asset owners use multifactor strategies while 35% use low volatility, the next most popular strategy, followed by 28% employing a value strategy. Most asset owners cite enhancement of returns and risk reduction as the primary motivations for employing these strategies, and most tend to use just one strategy.
Smart beta strategies are primarily equity-based. Only 9% of survey respondents report using fixed income smart beta strategies, but 24% are either currently evaluating their use or plan to do so, versus 20% a year ago.
Far more asset owners are interested in applying environmental, social and governance (ESG) considerations to a smart beta strategy. Among those with an existing smart beta allocation or plans to evaluate or implement one in the near future, 38% expect they will apply ESG considerations to the strategy. About twice as many European asset owners (55%) are keen on doing this compared with U.S. asset owners (25%).
Looking ahead, smart beta strategies are poised for growth, according to the survey. Two-thirds of asset owners who have already adopted such a strategy report that they are evaluating additional allocations, and one-third of those who evaluated such strategies in the past but decided against implementation are currently reconsidering that decision.
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