Allocation to smart beta expected to increase to 16%

Smart beta strategies are gaining traction across Europe, with 69% of existing users saying they expect to increase their allocation in the next three years, according to new research carried out on behalf of Invesco PowerShares.

”The Emergence of a New Era in Index Investing”, conducted by independent company CoreData amongst users and non-users of smart beta in Switzerland, Italy, Germany and the UK, looks specifically at the drivers, challenges and implementation of smart beta and the potential for future adoption.

It paints a positive picture for smart beta growth, with 60% of users feeling that smart beta strategies will become a widely accepted investment over the next few years.

The report highlights that wealth respondents and financial advisers are increasingly turning to smart beta as an integral part of investor portfolios, with smart beta currently making up 9% of a user’s total portfolio.

Of those that use smart beta, 91% of users say that it had met their expectations, and 78% recommend it for clients, colleagues and investment professionals.

The main reason for respondents first investing in smart beta was a conviction in the selected strategy, followed by a need for diversification.

However, specifically in the UK, users are more influenced by cost factors than their Continental European peers, which can perhaps be explained by the UK Financial Conduct Authority’s Retail Distribution Review requiring transparency of fees and charges.

However, demand is currently underpinned by the needs assessments and recommendations of professionals rather than external demands from clients. Wealth respondents and advisers are positioning smart beta to clients in a number of ways, in particular as either a potential way to meet an investment outcome or as part of a cost assessment.

According to the report, many adopters of smart beta used traditional indexing investments as a stepping stone to smart beta, with 63% of smart-beta user respondents having begun with market cap-weighted indices.

When it comes to implementation of smart beta, different strategies are used in a multitude of ways. A popular approach used by 75% of users is to place investments as part of either their tactical or strategic allocation (or both).

There is an even split in this group (42% respectively) of users who place investments as part of either their tactical-only or strategic-only allocation. Another investment methodology is to invest using a core and satellite approach. 45% of users use this approach although it should be noted that they can use different frameworks and smart beta strategies in multiple ways simultaneously.

Non-users of smart beta generally sat in three groups: those who do not invest because of a lack of knowledge (52% of non-users say that they do not fully understand the benefits of smart beta strategies), those restricted by their organisation’s investment approach (32%) and those who are simply advocates of asset management (83%).

The survey revealed some unique challenges users experienced when first investing, with the most challenging consideration being understanding how a strategy impacts exposures to certain factors, asset classes as well as geographic exposures.

However, most investors do not see these issues as difficult to deal with. Once confidence in strategies had been established, 69% of users began with a single strategy while 31% decided to invest in multiple strategies at the outset, with the choice being driven by the needs and aims of the investor. The most popular initial strategies were low volatility (46% of users selected this), dividend (44%) and fundamentally weighted (40%).

The research highlighted considerable differences in the appetite for smart beta across Europe. In Germany, 83% of users said their allocation would increase within the next three years, along with 64% of UK respondents and 69% of those in Switzerland.

In Italy only 59% of users expect allocation to increase. Whilst initial portfolio allocation to smart beta started in single figures and has increased, the increase has not been significant because many users have only recently invested in smart beta.

However, it is within the next three years that users expect portfolio allocation to increase significantly, with UK users expecting it to go from 12% of total portfolio currently, to 20%, Germany from 10% to 19%, Switzerland from 7% to 12% and Italy from 8% to 14%.

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