Smart beta comes of age

18 February 2014   Category: News, Global, Europe, North America   By Asia Asset Management

According to a new State Street Global Advisors (SSgA) study entitled Beyond Active and Passive, Advanced Beta Comes of Age, advanced beta strategies are playing a more influential role in some of the world’s largest portfolios. Forty-two percent of investors currently use advanced beta and another 24% plan to do so over the next three years.

Advanced beta, also referred to as smart beta, combines elements of alpha and beta in that it seeks to capture performance through targeted, rules-based investment strategies, while retaining the benefits of traditional indexing, including transparency, objectivity, low cost and diversification. Seventy-five percent of the investors surveyed said that the strategies are an attractive alternative to both active and passive fund management and a powerful evolution in asset allocation strategies.

“Advanced beta strategies play an important role in helping investors to construct holistic investment strategies while keeping risk and costs in check,” said Lynn Blake, CIO, global equity beta solutions at SSgA. “Our study found that more than half of institutional investors in North America and Europe will be using advanced beta strategies in the near future. The recent spike in equity market volatility, and a reduced appetite for active strategies, may encourage further adoption of advanced beta based on its track record of improving risk adjusted returns.”

Key findings:

• Although advanced beta is often marketed as an alternative to cap-weighted indexing, many investors see advanced beta as a replacement for active and are three times more likely to fund an advanced beta allocation from active rather than passive;

• Europe is ahead of US institutional investors in adoption, allocation and measurement of advanced beta strategies with 25% of European respondents allocating 20% or more of equities in their portfolio to advanced beta as compared to 4% for North American respondents;

• Nearly 40% of investors with a current allocation to advanced beta strategies are using low-volatility and low-valuation, either combined or separately;

• While 70% of investors report high levels of awareness about advanced beta, only 40% are confident about implementation.

“The main advantage that advanced beta strategies provide is the ability to select a portfolio that best meets specific risk and return objectives, versus taking a one-size-fits-all approach,” said Kristi Mitchem, executive vice president and head of the Americas institutional client group at SSgA. “While we are still on the early part of the adoption curve with these strategies, investors are becoming aware that similar returns can be achieved at a lower cost than traditional active management. That is a trend that can’t be ignored.”

The study surveyed 300 institutional investors from North America and Europe to measure adoption and implementation of advanced beta strategies.