Focus on smart beta – bfinance survey reveals surge in institutional demand

Institutional investors across Europe are looking to smart beta solutions to reduce volatility and increase returns, according to bfinance’s Pension Fund Asset Allocation Survey.

Smart beta is an alternative way of investing in indices. The aim is to outperform the traditional index, or the market beta, while keeping the volatility of a portfolio at a minimum.

A smart beta fund tracks an index or uses a mechanical investing strategy in order to provide the returns associated with a particular strategy without the expense of active management, so it is essentially a cheaper way of trying to achieve outperformance.

The bfinance survey looked at asset owners representing a total of $350bn. Three quarters of them are based in Europe and the rest in North America and a small portion in the Middle East.

The interest in smart beta strategies comes primarily from the European region. The difference between continental Europe and the UK is that in Europe, especially in the Nordics, investors have already moved onto “phase two” of smart beta investing, having discovered these strategies earlier on, while UK institutions are catching up now.

Of all the survey respondents, 43% say they would consider moving traditional passive investments to smart indices and alternative solutions in the year ahead. In continental Europe this figure is slightly lower, with 36% of investors intending to increase exposure.

However, the figures show that more European institutions are already invested in these strategies than their North America peers. Of continental European investors, 45% say they are already invested in smart beta, while across the world this figure is lower at 37%.

The ways institutions allocate to these strategies in the UK and in Europe differ. While the Nordic countries have moved onto creating their own customised indices, UK institutions tend to go for low volatility and risk weighted strategies, with the aim of reducing volatility without losing performance.

Olivier Cassin (pictured), managing director for research and development at bfinance, says European investors have tended to invest in these strategies earlier on and are now designing their own “smart strategies.”

At the forefront of this development are the Dutch and Scandinavian pension funds, which traditionally act as first movers in many innovative developments.

Cassin sees them beginning to blend various smart beta strategies to produce an optimal mix, intended to outperform the index and reduce the portfolio volatility at the same time. These strategies include small and mid cap equities, low volatility, momentum and value.

“By creating a customised index investors are able to tilt the portfolio towards some of these features, which allows them to choose between a whole set of strategies,” says Cassin.

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