Most Smart Beta Users Satisfied, But Not All Investors, Advisors Get The Message - Survey

Tom Burroughes

7 December 2015

The overwhelming majority of investors and advisors using “smart beta” products in portfolios are satisfied customers, according to a survey by Invesco Powershares, an exchange-traded fund provider.

Its survey of 220 high net worth investors and 80 financial advisors showed there was a split of 256 users of smart beta products, with the remaining 44 respondents not using them. The survey was carried out between May and June this year in Germany, Italy Switzerland and the UK. CoreData carried out the research.

The trend of investing known as smart beta describes how an index replicates a style of investing to obtain returns associated with a particular strategy without the cost of active management. These are rules-based investment strategies that don’t depend on market capitalisation. One segment of all this activity is the market for exchange-traded funds and products, enabling investors to tap into a particular style or investment approach by simply buying shares in a listed ETF, for example. A number of industry players, such as BlackRock, Lyxor (part of Societe Generale) and Amundi (a recently-listed investment house), offer smart beta funds.

On average in the sample, smart beta makes up 9 per cent of a user’s total portfolio, the Powershares survey found. Of those that use smart beta, 91 per cent say that it had met their expectations, and 78 per cent would 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 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.

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

Non-users of smart beta generally sat in three groups: those who do not invest because of a lack of knowledge (52 per cent 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 per cent) and those who are simply advocates of active asset management (83 per cent).

There is a wide range of views across Europe towards this investment trend. In Germany, 83 per cent of users said their allocation would increase within the next three years, along with 64 per cent of UK respondents and 69 per cent of those in Switzerland. In Italy only 59 per cent 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, the survey found. However, within the next three years usage is predicted to rise, with UK users expecting it to go from 12 per cent of total portfolio to 20 per cent, Germany from 10 per cent to 19 per cent, Switzerland from 7 per cent to 12 per cent and Italy from 8 per cent to 14 per cent.