FTSE Russell, a leading global index provider, has released the results of a survey of US-based investment advisors highlighting current perceptions and adoption levels of smart beta strategies in the community.
US investment advisors are overwhelming in favour of allocating more to smart beta strategies.
The key takeaways from the survey point to a necessity for greater education amongst advisors with only 18% of respondents admitting to being “very familiar” with the strategies. Encouragingly, there is evidence of continued demand for smart beta products which will drive industry growth and support exchange-traded fund (ETF) providers who have embraced these strategies.
“Factor-based and alternatively-weighted indices have transformed the investment landscape,” said Rolf Agather, Managing Director of North America Research for FTSE Russell. “It is clear that retail advisors are embracing investment products based on these indices as a way of incorporating new ideas into their clients’ portfolios. Our findings indicate that retail financial advisors view smart beta as an important portfolio tool for addressing investment challenges.”
The principal reason cited from those advisors not using smart beta was insufficient knowledge, followed by a lack of track record. Of the investors already using smart beta strategies, most viewed them as an alternative to active strategies and were primarily implementing them for downside protection, volatility control and increased alpha.
Of the 307 respondents, two thirds claim to already use smart beta products with 89% agreeing that they are interested in further allocations towards these strategies. Looking at the strategies currently employed on behalf of clients there is a clear preference for dividend and quality-based funds. FTSE Russell highlighted the difference here compared to institutional clients who have a preference for low volatility and fundamentally-weighted products.
Where are investors currently allocating their smart beta assets? Primarily to dividend and income funds (36% of respondents), followed by high quality (27%) and equally-weighted (26%). Looking forward, most advisors will likely continue to favour quality (40%) and dividend strategies (35%), followed by low volatility (35%).
Momentum and equal-weighted strategies exhibit a more modest outlook for adoption. In the case of equal-weighted this could be the result perceptions that strategy is overly naive in light of new product developments, while for momentum it may be due to a lack of familiarity with the diversification and return benefits the strategy can provide in a portfolio.
Interestingly, a majority (over 70%) of advisors are allocating to two or more strategies. From this we can see that investors view these strategies as complementary and are looking to diversify. This is in keeping with the outlook for the adoption of multi-factor products with 37% responding that they were “very likely” to use these products in the future. Other popular next-generation smart beta products included currency-hedged dividend strategies (32%) and fixed income (23%).
To be eligible for the study, which was conducted in June 2015, advisors had to have more than $20 million in assets under management, at least 4% of assets invested in ETFs and at least 20% in fee-based annual revenue. Survey respondents were primarily drawn from wirehouses (29%), regional broker dealers (23%), Registered Investment Advisors (23%) and independent broker dealers (21%). Of these, 84% had more than 10 years experience with 52% managing more than $100 million.