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Smart beta allocations to account for 16 per cent of portfolios in next three years says, Invesco PowerShares

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Smart beta strategies are gaining traction across Europe, with 69 per cent of existing users saying they expect to increase their allocation in the next three years, according to new research carried out on behalf of ETF provider Invesco PowerShares. 

”The Emergence of a New Era in Index Investing”, conducted by independent company CoreData amongst users and non-users of smart beta in Switzerland, Italy, Germany and the UK, looks specifically at the drivers, challenges and implementation of smart beta and the potential for future adoption. It paints a positive picture for smart beta growth, with 60 per cent of users feeling that smart beta strategies will become a widely accepted investment over the next few years. 
 
The report highlights that wealth respondents and financial advisers are increasingly turning to smart beta as an integral part of investor portfolios, with smart beta currently making up 9 per cent of a user’s total portfolio. Of those that use smart beta, 91 per cent of users say that it had met their expectations, and 78 per cent recommend it for clients, colleagues and investment professionals. 
 
The main reason for respondents first investing in smart beta was a conviction in the selected strategy, followed by a need for diversification. However, specifically in the UK, users are more influenced by cost factors than their Continental European peers, which can perhaps be explained by the UK Financial Conduct Authority’s Retail Distribution Review requiring transparency of fees and charges. 
 
However, demand is currently underpinned by the needs assessments and recommendations of professionals rather than external demands from clients. Wealth respondents and advisers are positioning smart beta to clients in a number of ways, in particular as either a potential way to meet an investment outcome or as part of a cost assessment. 
 
Bryon Lake (pictured), Head of Invesco PowerShares EMEA, says: “The results of this year’s research support our view on the continuing momentum behind factor-based indexing in Europe. Despite some market variations, three key themes emerged. The first is that factor-based indexing is viewed as a solution to the needs-based requirements of the investment industry. The research shows that expected outcomes matter and both the wealth respondents and financial advisers are becoming increasingly receptive towards smart beta strategies because of their ability to provide outcomes to help meet investment objectives.
 
“Secondly, smart beta strategies can be implemented into portfolios in multiple ways and can either complement existing passive and active strategies or begin to replace them as an alternative investment tool – signalling a new era for index investing. Lastly, not only are investment professionals using factor-based strategies, they are also becoming promoters of these strategies, recommending them to both clients and peers within the industry.”
 
According to the report, many adopters of smart beta used traditional indexing investments as a stepping stone to smart beta, with 63 per cent of smart-beta user respondents having begun with market cap-weighted indices. When it comes to implementation of smart beta, different strategies are used in a multitude of ways. A popular approach used by 75 per cent of users is to place investments as part of either their tactical or strategic allocation (or both). There is an even split in this group (42 per cent respectively) of users who place investments as part of either their tactical-only or strategic-only allocation.  Another investment methodology is to invest using a core and satellite approach. 45 per cent of users use this approach although it should be noted that they can use different frameworks and smart beta strategies in multiple ways simultaneously.   
 
Non-users of smart beta generally sat in three groups: those who do not invest because of a lack of knowledge (52 per cent of non-users say that they do not fully understand the benefits of smart beta strategies), those restricted by their organisation’s investment approach (32 per cent) and those who are simply advocates of asset management (83 per cent).
 
The survey revealed some unique challenges users experienced when first investing, with the most challenging consideration being understanding how a strategy impacts exposures to certain factors, asset classes as well as geographic exposures.  However, most investors do not see these issues as difficult to deal with. Once confidence in strategies had been established, 69 per cent of users began with a single strategy while 31 per cent decided to invest in multiple strategies at the outset, with the choice being driven by the needs and aims of the investor.  The most popular initial strategies were low volatility (46 per cent of users selected this), dividend (44 per cent) and fundamentally weighted (40 per cent). 
 
The research highlighted considerable differences in the appetite for smart beta across Europe. In Germany, 83 per cent of users said their allocation would increase within the next three years, along with 64 per cent of UK respondents and 69 per cent of those in Switzerland. In Italy only 59 per cent of users expect allocation to increase.  Whilst initial portfolio allocation to smart beta started in single figures and has increased, the increase has not been significant because many users have only recently invested in smart beta. However, it is within the next three years that users expect portfolio allocation to increase significantly, with UK users expecting it to go from 12 per cent of total portfolio currently, to 20 per cent, Germany from 10 per cent to 19 per cent, Switzerland from 7 per cent to 12 per cent and Italy from 8 per cent to 14 per cent.

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