In a survey, the asset management firm Source examines that smart beta strategies are increasingly used by institutional investors. 27 percent are already invested in these products and 31 percent of the remaining are planning to do so.
The idea of factor investing is to distil investments into something very simple, weather it be macro-economic factors such as economic growth, inflation and interest rates or style factors such as value, quality, momentum or volatility. Smart-beta strategies can be used to diversify and, depending on the strategy, reduce the volatility of the portfolio. A recent study of the UK-based asset manager Source proofs, that smart-beta products become more important in institutional investor’s portfolios. 28 percent of respondents claimed that they aim at higher dividend yield using smart-beta products.
Two third of questioned investors say that the share of smart-beta products in their portfolio will increase until 2019. Only four percent claim that they expect it to reduce. One third expects this increase to amount to as much as 30 percent.
In another recently published study among 200 institutional investors, BlackRock could confirm those findings. Two thirds of respondents said that they increased their usage of factor investing over the last three years and 60 percent plan on increasing it further in the next three years. In this study, investors said that the prime driver to make use of factor investing in to improve returns.
Smart beta products try to overcome downsides of classical market-capitalisation weighted indexes. But whether it is a concept to be used to minimise risk or increase performance depends massively on the characteristics of the product at hand and the rules used to select investments. According to an analysis of Absolute Research, risk minimising product are stronger during weak market times, cyclical product are stronger during well performing markets.
“Over the long term, smart beta concepts have clearly outperformed classic market-cap weighted benchmarks. Doing so, investors must keep in mind that the alternative weighting of indices may also shift regional or industrial focuses and that market risk cannot really be reduced with smart beta. Institutional investors with tight capital budgets should consider this and use other factor strategies as appropriate,” says Michael Busack, managing director of Absolut Research GmbH.