Smart beta adoption amongst institutional asset owners has reached a record high of 58% in 2019, ten percentage points higher than 2018, according to the sixth annual ESG & Smart Beta survey conducted by FTSE Russell.
Rolf Agather, Managing Director, Research & innovation, FTSE Russell.
That figure rises to nearly eight-in-ten (78%) when including asset owners who are not current smart beta users but are evaluating implementing a smart beta index-based strategy.
Adoption rates increased in Europe, North America, and Asia Pacific, and amongst institutions of different sizes.
The survey reflects trends seen in the wider ETF industry with investors ploughing $77.6bn into smart beta ETFs globally during 2018, bringing total assets under management within the space to $618bn, according to ETF industry consultant ETFGI.
As of January 2019, smart beta ETFs had enjoyed three years’ worth of consecutive monthly net inflows.
European asset owners maintain the highest rate of smart beta adoption at 65% of survey respondents, followed closely by North American asset owners at 60%. With an annual increase in their adoption rate of 18 percentage points, North American asset owners are closing the gap on their European counterparts.
The survey shows that asset owners are becoming increasingly comfortable with smart beta strategies and there is less uncertainty about their longer-term track records. Respondents are also viewing smart beta strategies as more similar to traditional active rather than passive strategies. Moreover, the number of institutions adopting smart beta to gain cost savings has more than doubled between 2014 (15%) and 2019 (31%).
Rolf Agather, Managing Director, Research & innovation, FTSE Russell, said, “Risk reduction, return enhancement and improved diversification continue to drive smart beta adoption among institutional investors globally.”
Multifactor strategies in demand
Multifactor strategies continue to drive adoption rates, with users of the strategy increasing from 49% in 2018 to 71% in 2019. Uptake has more than tripled since 2015 and has significantly outpaced the adoption of low volatility (35%) and value (28%) strategies.
Multifactor strategies have also proven popular with new smart beta users as 69% of asset owners who have implemented a smart beta strategy for the first time within the last two years have opted for this approach.
Agather added, “Within smart beta, multifactor index-based strategies have undoubtedly been the market’s favoured choice. We expect sustained growth in smart beta, especially when it comes to multifactor combination strategies.”
Europe leads in ESG smart beta
The proportion of European smart beta users who are expecting to apply environmental, social, and governance (ESG) considerations to a smart beta strategy increased from 55% in 2018 to 77% in 2019. Conversely, adoption of ESG considerations into smart beta strategies remained flat in North America due to a lack of stakeholder demand.
Among those who anticipate applying ESG considerations to a smart beta strategy, over three quarters are motivated by avoiding long-term risk, compared to a little over half last year.
David Harris, Head of Sustainable Investing, FTSE Russell, said, “Integrating or looking to integrate ESG into smart beta strategies is rapidly becoming the norm, especially in Europe, where over three-quarters of asset owners have already applied or intend to apply ESG into smart beta allocations. We call this integration ‘Smart Sustainability’ and these trends are reflected in our experience of working with clients in new smart beta mandates.”
The survey was conducted in January and February 2018 and includes responses from 178 asset owners with the majority of participants drawn from North America (46%), Europe (29%), and Asia Pacific (19%). A wide mix of organizations is represented including government organizations (31%), corporations or private businesses (16%), unions or industry-wide pension schemes (15%), and non-profit organizations or universities with the rest a mix of insurance companies, sovereign wealth funds, healthcare organizations, and family offices.
Sixty-seven percent of survey respondents manage defined benefit plan assets, 36% manage defined contribution plan assets and 14% manage endowment or foundation assets. Respondents also included asset owners with insurance general accounts, sovereign wealth funds and other types of institutional entities.
In terms of the assets under management of respondents, 22% have under $1bn, 27% have $1-10bn and 51% have more than $10bn. The total AUM of survey participants is estimated to be over $5 trillion.