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FTSE Russell report finds new high in smart beta, ESG and multi-factor index adoption


FTSE Russell’s report Smart beta: 2017 global survey, finds that there has been a new high in global smart beta index adoption and continued strong interest in smart sustainability and multi-factor indexes from global institutional asset owners.

The percentage of asset owners reporting an existing smart beta index allocation has reached a new peak of 46 per cent, up from 36 per cent last year, according to the report. The trend over the past three years shows that increasing global growth and adoption of smart beta is continuing in 2017, the firm says.

Adoption in Europe is still greater than North America and Asia Pacific, with 60 per cent of asset owners reporting an allocation. Notably, the largest rise in smart beta adoption this year is among asset owners with USD1-USD10 billion in AUM. This contrasts with last year, when the largest rise in smart beta adoption came from asset owners with under USD1 billion in AUM.

Results from this year’s survey also detail strong interest in applying ESG considerations to smart beta, known as smart sustainability. In North America and Europe, interest in smart sustainability index-based strategies is greatest among asset owners with AUM greater than USD10 billion. Yet regional differences persist; within this size tier, nearly 80 per cent of asset owners domiciled in Europe anticipate applying ESG considerations to a smart beta strategy while only 30 per cent of asset owners domiciled in North America do. The survey further highlights that the primary motivations of the asset owners surveyed are investment decision-led rather than driven by regulatory requirements or societal goals, the report says.
Peter Gunthorp, Managing Director of Research & Analytics, FTSE Russell, says: “Our fourth annual smart beta survey demonstrates asset owners have readily adopted smart beta indexes and continue to evolve their strategies based on these indexes. The results indicate that risk reduction, return enhancement and improving diversification remain as the primary objectives for use of smart beta. FTSE Russell has also seen strong interest, particularly from European asset owners, in integrating ESG considerations with smart beta, highlighting a new trend for passive investment strategies.”

Other findings from the report are that smart beta index adoption continues to grow, having increased from 2016 to 2017 with nearly half of asset owners surveyed holding a smart beta index allocation.

Adoption growth was fed by strong numbers of smart beta evaluators observed in 2016. Findings suggest that the pipeline of asset owners evaluating smart beta remains strong and is comprised of first-time evaluators, re-evaluators, and asset owners considering adding to an existing smart beta allocation.

In terms of smart beta, return enhancement and risk reduction persist as the primary objectives expressed by those surveyed for use of smart beta. Cost savings continues to grow in importance, the survey finds.

Multi-factor smart beta indexes increase in popularity this year, with multi-factor smart beta combinations becoming the most popular smart beta index construction used; they are also the most widely evaluated smart beta index. Among single factor methodologies, Value and Low Volatility are most widely used and evaluated, the report reveals.

The authors write: “In the 2017 survey, we introduced an analysis of smart beta evaluation and usage trends for fixed income, which is intended to grow and evolve with this nascent market. The establishment of a well-defined set of factors has not taken place yet for the debt markets and, not surprisingly, far fewer asset owners indicated they have evaluated smart beta for fixed income.”

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