Smart beta strategies are continuing to gain traction among institutional investors, with strategies that incorporate environmental, social and governance (ESG) factors driving increased interest, according to a new survey of institutional investors from indexing firm FTSE Russell.
Ninety-one per cent of the respondents to the fifth annual global institutional asset owner smart beta survey said they have either already allocated assets to a smart beta investment, or plan to consider it in the next 18 months. Reported investor interest is up by 16% over the past five years, the survey found.
Investor interest in smart beta indices that incorporate ESG factors is particularly on the increase, according to the survey. Nearly 40% of respondents expect to apply ESG considerations to smart beta strategies in the next 18 months. This being driven by performance expectations, rather than just asset allocation, or social considerations, FTSE Russell said in a news release.
Additionally, the survey found that usage of multi-factor combination smart beta strategies is on the increase. Forty-nine per cent of respondents are using multi-factor strategies, up from 20% when the survey first measured this metric in 2015. As well, 70% of respondents said they are currently considering multi-factor strategies, “far surpassing all other strategies.”
Conversely, investor interest in fundamentally weighted strategies has declined, FTSE Russell said. In 2018, 19% of respondents surveyed are using these strategies, down from 41% in 2014.
Despite the intensifying interest, the survey also found that investors “remain uncertain on how to best implement smart beta into their investment strategies.” Indeed, FTSE Russell said that more than half of respondents say that difficulty in determining the best strategy, or combination of strategies, remains one of the top barriers to making smart beta investments.
The survey was carried out in January and February with 185 global institutional investors, including government agencies, corporations, non-profits, unions, pension schemes, insurance companies, sovereign wealth funds, and family offices. Total assets under management of the survey participants is estimated to be more than US$3.5 trillion globally.