Satisfaction with smart beta products among users has hit a record 97%, up from 96% in 2016 and 91% in 2015, according to the results of the fourth annual European smart beta survey commissioned by ETF provider Invesco PowerShares.
Over 80% of respondents would recommend smart beta strategies to a colleague.
The report, “Smart beta strategies: more bricks for portfolio building”, explores the drivers of smart beta adoption, the implementation challenges faced by current users, and the expectations for future allocation.
To conduct the survey, over 400 industry practitioners – including portfolio managers, chief investment officers, fund selectors and fund analysts – in six European markets were consulted. The research revealed that smart beta usage is increasing across Europe (only one in five reported they do not yet use smart beta) and that strategies are becoming more sophisticated.
More than three quarters of respondents said they had experienced pressure to deliver portfolios that perform strongly in a shorter time frame. Low yields, the need to find value, and correlation of assets were the most significant challenges identified by professional investors. As such, professional investors are increasingly turning to smart beta as an approach to achieving their clients’ investment objectives.
The top three reasons stated for investing in smart beta were: conviction in the selected strategy/ philosophy (48% of respondents); need for diversification (47%); and disappointing returns for active management (31%).
Despite these high demands from smart beta strategies, satisfaction remains high among current users. Additionally, of all respondents surveyed, a record 81% of investors would recommend smart beta products to colleagues and other investment professionals, up from 73% in 2016.
Mike Paul, head of Invesco PowerShares EMEA, explains, “The life of a professional investor is not getting any easier. Clients’ investment horizons are contracting, portfolio reviews are becoming more frequent and risk management is becoming as important as returns in an uncertain world. Smart beta is no panacea, but it does have the potential to help with major and emerging challenges such as low yields and finding value. Smart beta users are clearly recognising these benefits, not only increasing their allocations but becoming more sophisticated the longer they are invested.”
The most popular asset classes accessed via smart beta in 2017 were: European equity – cited by 65% of smart beta users, US large-cap equity (51%), and domestic equity (40%).
Although most users are clearly still focused on equity asset classes, Invesco reports growing interest for smart beta in the fixed-income space – well over half of institutional investors surveyed would consider allocating to fixed-income smart beta strategies.
Invesco also notes that the strategies sought by investors are changing, particularly in the retail space. In particular, momentum, quality and multi-factor strategies are booming, with usage of these strategies almost doubling from 2016 to 2017.
Users of smart beta products currently have 13% of their total assets invested in smart beta strategies, up from 8% last year, and expect to increase this to 23% over the next three years.
Paul notes: “While smart beta users are very satisfied with their smart beta investment experience and intend to continue increasing their allocations moving forward, they have high expectations. Attention must therefore be paid to further education, further product innovation, and – especially in the fixed income space – building partnerships with fund providers if those expectations are not to be disappointed.
“Smart beta has been one of the definitive market trends of the past decade, and we believe that smart beta strategies play an increasingly important role in ensuring investors achieve the outcomes they seek. If the market is the best benchmark for product excellence, then it is clear that smart beta is set to play an increasingly central role in the future of the European asset management sector.”
Interestingly, although the survey points to robust growth and development in the smart beta space, Invesco also found an entrenched scepticism amongst non-users. Over half of these explain their reluctance to adopt such strategies due to a firm belief in active management.