While market volatility will continue to fuel the growing popularity of multi-factor smart beta strategies in 2016, there will be greater focus on diversification than trying to predict which factor will dominate, according to asset management research firm Cerulli.
Market volatility fuels interest in diversified multi-factor smart beta strategies
Factor investing sits between passive and active management, and attempts to deliver superior returns to investors by using an alternative form of indexing based on risk premia.
This approach is one of the fastest growing segments of the exchange-traded funds industry, with providers such as iShares, Vanguard, WisdomTree, State Street Global Advisors, Invesco PowerShares, First Trust, UBS, Lyxor and Guggenheim all active in the space.
“For delivering alpha, multi-factor strategies that tip-toe the line of active investing will gain favour,” said Barbara Wall, Europe managing director at Cerulli Associates, a global analytics firm.
In a Cerulli survey conducted in mid-2015, when asset managers were asked which smart beta products would see the strongest institutional sales over the next 12-24 months, 50% of UK managers said multi-factor, with 30% of Nordic managers answering the same.
“Over the past year as market uncertainty has reigned, multi-factor smart beta strategies have garnered greater interest. We expect total assets under management (AUM) to continue to increase not only in Europe but in the US and Asia as well,” said Justina Deveikyte, a senior analyst at Cerulli.
Big data platforms and improved off-the-shelf analytics that better understand how different factors work is also growing the market by broadening the investor base beyond sophisticated institutional clients, notes Cerulli.
It estimates that total AUM for smart beta portfolios in Europe has grown from €9.5 billion (US$10.6 billion) in 2011 to €32 billion by the close of 2015. Return-oriented AUM increased from €5.7 billion to €23.5 billion over the same period.
“Investors sitting in more cap-weighted passive implementations or classic active management strategies will be looking at the multi-factor smart beta strategies as suitable alternatives because they are cost effective, transparent, and are more likely to live up to potential,” added Deveikyte.