Asset owners are still struggling to place smart beta within their portfolio, with investors split on whether the products are active or passive, according to a Russell Investments survey.
The survey showed 39% of investors with experience of smart beta—from a pool of more than 50 asset owners—said the strategies were a replacement for passive management. However, a similar amount said the strategies could replace active or passive. Only 20% said they stood in for active management alone.
“‘Smart beta’ does not denote a single investment strategy, but rather several distinct, index-based strategies.” – Rolf Agather, Russell InvestmentsSmart beta newcomers believed differently, with only 13% stating they were a substitute for passive management. Instead, half of these investors viewed smart beta as an allocation for both passive and active management.
Russell also found European investors were far more likely to identify smart beta as a replacement passive strategy than North Americans.
The lack of consensus among investors extended to how smart beta strategies were implemented, according to Russell’s research.
Respondents largely preferred separate accounts and mutual funds for long-term strategic allocations, with 82% using external managers. However, for tactical adjustments, asset owners predominantly chose exchange-traded funds (ETFs) and derivatives.
“A key question is whether the growing adoption of smart beta will continue to drive increased ETF usage among institutional investors,” Rolf Agather, managing director of Russell’s global index research and innovation team, said. Russell’s research showed North American investors were far more likely to use ETFs than their European counterparts.
Russell also found the majority of asset owners utilized more than one smart beta strategy in their allocations. Nearly 60% of respondents said they used at least two strategies, of which a third said they used three or more approaches.
“It’s important to remember that ‘smart beta’ does not denote a single investment strategy, but rather several distinct, index-based strategies,” Agather said. “Each strategy has a unique objective and set of characteristics that enable investors to more precisely construct their portfolios as they seek specific outcomes.”
Combinations of multiple strategies were common, the survey revealed, with more than half of investors using two or more. More than a third of those using multiple strategies combined low volatility and fundamental indexing products.
“The increasing combination of smart beta strategies within portfolios highlights the need for continued education, for better understanding not only of the how strategies are likely to behave individually, but also of how they are likely to interact with each other over time,” Agather said.
Asset owners invested in more than one strategy were also likely to have at least a 15% overall allocation to smart beta.
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