Third annual FTSE Russell survey shows Europe leads in smart beta index use

52% of European asset owners are using smart beta indexes…

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Peter Gunthorp, managing director of European research, FTSE Russell

– 62% with existing smart beta allocations evaluating additional indexes

– Cost savings a primary objective for asset owners above $10 billion

– Largest growth in adoption has been European asset owners with under $1 billion in assets

FTSE Russell confirms that smart beta index adoption rates in Europe have been the highest globally over the past three years. According to its third annual global institutional market survey – Smart Beta: 2016 Global Survey Findings from Asset Owners – FTSE Russell confirms the smart beta trend has matured to the point that large numbers of asset owners now consider smart beta indexes to be an important part of the investing toolkit.
For the 2016 survey, 52% of the European asset owners surveyed have adopted smart beta indexes, compared to 28% in North America and 38% in Asia. The segment with the largest growth in adoption has been European asset owners with under $1 billion in assets; in this segment, adoption has grown from 15% in 2014 to 47% in 2016.
In addition to growth in adoption, smart beta indexes are an increasingly important component of equity portfolios. Over half of European asset owners with smart beta allocations have over 20% of their portfolio invested in smart beta investment vehicles. European asset owners, particularly those who have had smart beta allocations for more than two years, are a significant driver of the trend toward larger smart beta allocations; nearly seven in 10 surveyed have over 20% of their equity portfolio invested in smart beta investment vehicles.
Peter Gunthorp, managing director of European research, FTSE Russell: “The survey demonstrates accelerating interest in and implementation of smart beta indexes among global institutional asset owners. While many asset owners and consultants, particularly those in Europe, have increased their understanding of smart beta, continuing innovations in other asset classes and the multi-factor arena underscore the need for continuing information and education. We hope the results of the survey provide a degree of insight for all market participants with an interest in smart beta.”
The third annual survey was conducted in January and February 2016. The 253 asset owners included this year (up from 214 last year and 181 in 2014) are drawn from North America (49%), Europe (33%) and Asia (13%). The global research team at FTSE Russell, a pioneer in smart beta through predecessors FTSE Group and Russell Indexes, engaged a mix of organizations including corporations, government entities, union or industry-wide pension schemes and non-profits to gather these findings. Total assets under management for survey participants is estimated at over $2 trillion globally.
Other key survey findings:

Smart beta evolution and adoption. 2016 is a turning point in smart beta evaluation – the percentage of asset owners globally currently evaluating smart beta has doubled since 2014. The strongest growth in smart beta index adoption is among asset owners with under $1 billion in assets.

Outlook. Survey results suggest that continued growth in smart beta indexes will be driven by those asset owners who are currently evaluating smart beta indexes, as well as by asset owners with existing allocations making larger investments in smart beta investment vehicles over time.

Why smart beta? Return enhancement and risk reduction continue to be the primary objectives for use of smart beta by asset owners: cost savings are more important in 2016 than in years past.

Smart beta strategies evolving. Smart beta strategies employed by asset owners have evolved over time, with an increasing share using high-quality, momentum and multi-factor strategies. And smart beta index-based investments are increasingly being considered as part of an active allocation, with 35% considering it an exclusively active strategy, up from 22% last year.

Vehicles for strategic & tactical implementation. Separate accounts are the most preferred vehicle for strategic implementation of smart beta, driven by demand from asset owners with more than $1 billion in assets. For tactical implementation of smart beta, asset owners are using a wide range of vehicles, including internal management of assets, separate accounts, ETFs and CITs (collective investment trusts).

Evolving role of external investment managers and consultants. The roles assumed by investment managers, consultants and index providers in the evaluation of smart beta vary depending on AUM tiers of asset owners. External investment managers are most extensively engaged with asset owners under $1 billion in AUM; consultants with asset owners between $1 billion to $10 billion in AUM; and index providers with asset owners with $10 billion or more in AUM.

Survey background and methodology:

Over 90% of survey respondents have either direct responsibility for selecting equity investments or play roles in teams that perform this function. This sample crosses a wide mix of organization types – corporations or private businesses (23%), government organizations (24%), unions or industry-wide pension schemes (18%), non-profit organizations or universities (14%).
The rest is a mix of insurance companies, sovereign wealth funds, healthcare organizations and family offices. 63% of survey respondents manage defined benefit plan assets, 45% manage defined contribution plan assets and 14% manage endowment or foundation assets. Respondents also include asset owners with insurance general accounts, sovereign wealth funds and other types of institutional entities.
The breakdown in assets under management for survey respondents was 20% for asset owners with less than $1 billion, 46% between $1 billion and $10 billion and 34% with more than $10 billion in assets under management. Total assets under management for survey respondents this year is estimated at over $2 trillion.



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