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Smart beta: 2017 global survey findings from asset owners

FTSE Russell is proud to present the fourth annual survey of global institutional asset owners’ adoption and evaluation of smart beta indexing. For the past four years we have recruited decision makers from across a broad spectrum of AUM tiers and at a variety of stages in their evaluation of smart beta. Almost 200 asset owners responded in 2017. Respondents are drawn from North America (43%), Europe (32%), Asia Pacific (19%) and other regions (5%) and have an estimated total AUM of over $2 trillion.

Over the past four years, our survey has documented global institutional asset owners’ growing interest in smart beta indexes and allocations to investable products based on those indexes. In the 2017 survey, nearly three-quarters of survey respondents have either implemented, are currently evaluating, or planning to evaluate smart beta index products. Just 9% of survey respondents have evaluated smart beta indexes and chosen not to implement any. Clearly, smart beta indexing has become an important part of the industry conversation.

Our survey documents what is trending in asset owners’ thinking about smart beta indexes. The headline trend belongs to multi-factor combinations: 64% of respondents who are currently implementing a smart beta index are using a multi-factor strategy. That is more than triple the rate in the 2015 survey (the question was not even asked in the 2014 survey). Furthermore, 71% 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 illustrates a growing awareness amongst asset owners of combining factors with a view to diversification, downside protection and return.

As in past surveys, risk reduction, return enhancement and improved diversification remain the top three motives for allocations to smart beta investable products. But cost saving has steadily increased in importance over the four years of the survey. So it is not surprising that 34% of respondents with smart beta allocations report funding them from active equity; another 35% report funding from a combination of active and passive equity. Interestingly, 51% of respondents also view smart beta indexes as useful for benchmarking active strategies.

New in 2017, we have included questions on smart beta in fixed income and questions on integrating environmental, social, and governance (ESG) considerations with smart beta indexes. Industry consensus about which fixed income factors have historically rewarded market participants has not yet occurred. Not surprisingly, few asset owners indicate they have evaluated smart beta for fixed income. We expect that to change going forward as research in this space evolves and new indexes are developed.

Regarding ESG, the greatest interest is coming from large European asset owners with over $10 billion in AUM. It may surprise some that the top motive for applying ESG considerations is not “societal good” but rather “avoid long term risk.” We expect that motive to remain top of mind as more asset owners consider ESG allocations.

The 2017 survey demonstrates robust growth in smart beta indexing, especially multi-factor indexes. Satisfaction with current users remains high, suggesting growth will continue. Among those asset owners who are re-evaluating smart beta indexes after having previously passing on them, 75% cited increased understanding through new information and 67% also indicated new types of smart beta strategies. This underscores the continuing need for 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.

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