FTSE Russell has posted its sixth annual survey of global asset owners’ views of smart beta. Smart beta is a strategy that uses indexes, but that is not traditionally cap-weighted, that is, one where the construction of the index itself incorporates the investment strategy, capturing investment factors or market inefficiencies. Smart beta is the active use of a tool long associated with passive investing.
This year 178 asset owners participated in the FTSE Russell survey, with estimated total assets under management of more than $5 trillion. Nearly half the participants (46%) are headquartered in North America, nearly three tenths (29%) in Europe.
A wide mix of owner types is represented, including government organizations, corporations, union owned pension schemes, and sovereign wealth funds.
A Shift to an Activist View
One bottom line of the report is that owner attitudes are shifting away from the “beta” part of smart beta toward the “smart” part. The owners see their smart beta positions as active more than passive. One manifestation of this shift is the level of concern about taking on new risk—”one of the few cited barriers to smart beta adoption that increased from 2018 to 2019.”
In broad terms, the overall percentage of owners/respondents who say that they see smart beta as comparable to active strategies is now at 46%. That is a considerable increase from the same number a year ago (35%). By region, North American respondents are more likely to see smart beta this way than are their European peers. By AUM, there is an odd “U” pattern. The respondents most likely to see smart beta as active are the smallest, followed closely by the largest entities. The intermediate entities are far behind them both in this respect.
The survey also indicates that there is a trend toward the adoption of a multi-factor strategy, which is significantly outpacing low-vol and value adoptions, though those are the two most popular single-factor strategies.
The multi-factor strategy is popular both among recent adopters and among the veterans in the field. In contrast, the value strategy has more users who are relatively recent adopters of smart beta, and the low-vol strategy has more users who have already been using smart beta for at least two years.
By AUM, Convergence
Back in 2014, when FTSE Russell started doing these surveys, there was a sizeable gap between large AUM asset owners and the smaller tiers over their willingness to buy in to smart beta strategies. In that year, only 9% of those with AUM of less than $1 billion had such positions. Already, though, 46% of those with AUM of $10 billion or more did so. In the intermediate tier, AUM between $1 billion and $10 billion, the number was 30%.
Today, the small-AUM tier has caught up with where the large-AUM tier was six years ago. Forty-six percent of the small players now use smart beta. For the intermediate tier the number is now 50% and for the large tier it is 66%. There is growth across all tiers, and the difference among them is far less marked.
Many of the respondents say they are re-evaluating their smart beta strategies. Among these, the top reason for the re-evaluation is that new information and education have improved the owners’ understanding of the issues. The second most frequently cited reason is a related one: smart beta has a longer track record than it used to. While the disclaimer of past performance is no guarantee of future results, an absence of past performance is scary. The passage of time has removed the scare factor.
In last year’s survey, the #1 reason for re-evaluation was the development of new types of smart beta strategy, especially the multi-factor approach. Increased off-the-shelf product availability was #2 that year.
The FTSE Russell report also looks at the question of implementation. It finds that “owners continue to rely heavily on external investment managers for information about smart beta strategies” and the numbers for this preference have remained consistent over the years of the survey.