Smart Beta Winning Fans as Volatility Fears Escalate

Real assets and dampened volatility are on the menu for institutional investors.

(January 29, 2014) — Institutional investors are set to ramp up allocations to smart beta, as fears over equity market volatility top their list of worries, research has found.

Almost a third of investors responding to a survey by consultants bfinance said they would move a chunk of their passive investments to alternative indexing strategies. This would mean 59% of respondents would be using the strategy over the next 12 months, up from 47% today, the survey showed.

In fact, risk-weighted and low volatility strategies were the most popular in a range of equity investment strategies, with 21% and 12% of investors respectively indicating they would allocate to them. Just 3% of respondents said they would allocate to equally weighted portfolios or value strategies.

However, over the next three years, investors will be keen to offload equities in general, bfinance said.

Just emerging market equities were shown to be set for any type of inflow—and this will only be from a net 3% of respondents over the next three years.

A net 10% of respondents said they would reduce their overall stock market exposure over the next three years, with developed economies seeing the largest outflows.

Infrastructure on the other hand, is set to receive massive capital flows as a net 35% of investors said they would increase their exposure to the asset class over the next three years. This was closely followed by real estate, which received the nod from a net 32% of investors saying they wanted to buy into the sector.

One of the overriding concerns driving these investment decisions was the fear of volatility, bfinance said.

Some 41% of respondents said asset price volatility and, separately, asset price collapse were “significant risks” to their portfolios that required a defined action plan. The same number of investors was similarly worried about another liquidity crunch. Just 18% of investors said asset price volatility was an insignificant risk, with the remainder deciding it was significant, but it could be dealt with “if required”.

Respondents to the survey included corporate and public pensions, family offices, and insurance companies.

To read the full survey, click here.

Related content: Should You be Worried about a Low Volatility Bubble? & Breaking Down Smart Beta Strategies