A new survey from Invesco Powershares, a leading exchange-traded fund issuer, has revealed strong momentum in smart beta adoption with over two thirds of investors expected to increase their allocation over the next three years.
Smart beta strategies are expected to constitute a significant portion of investor’s portfolios in the coming years.
The survey looks at the drivers, challenges and implementation of smart beta as well as the potential for future adoption amongst users and non-users of the products in Switzerland, Italy, Germany and the UK. It paints a positive picture for smart beta growth, with 60% of users feeling that smart beta will become a widely accepted investment strategy over the next few years.
The transparent and rules-based nature of smart beta strategies has made them an ideal candidate for the ETF wrapper. Global net inflows into ETFs support this with £53.7bn of assets being gathered by smart beta ETFs in the first 10 months of 2015 alone, according to industry consultant ETFGI.
Current users are on average allocating 9% of their portfolios to smart beta strategies but this figure is expected to increase to 16% by 2018, highlighting that wealth managers and financial advisers are increasingly turning to smart beta as an integral part of investor portfolios. It is expected that UK investors will be the most ardent adopters with allocations expected to rise to 20%, followed by Germany where this could reach 19%.
The main reason for respondents first investing in smart beta was a conviction in the selected strategy, followed by a need for diversification. However, specifically in the UK, users are more influenced by cost factors than their Continental European peers, which can perhaps be explained by the UK Financial Conduct Authority’s Retail Distribution Review requiring transparency of fees and charges.
As opposed to client driven demand, the adoption of smart beta looks to be driven by the efforts of wealth managers and advisors to meet the investment needs of clients whether this be to meet specific investment outcomes, such as reducing volatility in a portfolio, or to reduce costs.
Commenting on the survey results, Bryon Lake, Head of Invesco PowerShares EMEA, said: “The research shows that expected outcomes matter and both the wealth respondents and financial advisers are becoming increasingly receptive towards smart beta strategies because of their ability to provide outcomes to help meet investment objectives.
“Smart beta strategies can be implemented into portfolios in multiple ways and can either complement existing passive and active strategies or begin to replace them as an alternative investment tool signalling a new era for index investing.”
The most popular approach (75%) is to place smart beta investments as part of either their tactical or strategic allocation (or both). There is an even split in this group (42% respectively) of users who place investments as part of either their tactical-only or strategic-only allocation. Another investment methodology is to invest using a core and satellite approach with 45% of respondents using smart beta strategies in multiple ways simultaneously.
A recurring theme in many surveys on smart beta investing is that a lack of knowledge is deterring investors from adoption, 52% of respondents cited this as the primary determinant. This highlights the continued need for issuers to educate investors, a challenge that Invesco Powershares has looked to tackle by partnering with Cass business school on a series of research papers examining the origins, sources of returns, opportunities and due diligence challenges of smart beta.
Once confidence in smart beta had been established, 69% of users began with a single strategy while 31% decided to invest in multiple strategies at the outset, with the choice being driven by the needs and aims of the investor. The most popular initial strategies were low volatility (46% of users selected this), dividend (44%) and fundamentally weighted (40%).
The research highlighted considerable differences in the appetite for smart beta across Europe. In Germany, 83% of users said their allocation would increase within the next three years, along with 64% of UK respondents and 69% of those in Switzerland. In Italy only 59% of users expect allocation to increase.