UK institutions are set to lead expected growth in the smart beta industry, as total allocations to the asset class from European funds was predicted to grow by €211bn in four years.

Research from market intelligence provider, SpenceJohnson, found annual flows into smart beta from UK institutional investors would reach €15bn by 2018, up from €3.4bn now.

Flows from continental institutions will also grow, at a marginally slower rate, and will hit €29bn, up from from €8.4bn at present.

Total allocations for both UK and continental institutions are predicted to reach €211bn by 2018, up by over 290%, with continental funds accounting for the majority.

Risk smart beta strategies will grow the fastest, fuelled by interest from continental investors, and more sophisticated UK clients.

“UK growth in [smart beta] is likely to focus more on alternative index approaches when compared to Europe, where investors will continue to be attracted to the more complex (and expensive) advanced beta and advanced index approaches,” the report said.

SpenceJohnson said qualitative feedback from managers suggested the market was currently dominated by institutional investors, mainly made of defined benefit (DB) scheme.

The research, done in conjunction with CAMRADATA, also found the growth is to be focused on the index space for smart beta products; with advanced or alternative index usage outstripping advanced beta products.

However, it also suggested despite investors historically seeing alternative indices investing as a replacement for passive, smart beta is increasingly being used instead of active management.

Research from consultancy bfinance, and bank Northern Trust, showed over 70% of investors surveyed in 2013 would not move passive into smart beta, compared to around 55% a year earlier.

Some 70% of respondents to a separate survey also said their smart beta allocations would mainly come from active allocations.

Geographies split the market with regards to demand, and the type of smart beta exposure schemes were looking for.

The Netherlands, Nordics and the UK contribute a high level of demand, but differ as Dutch investors look for risk exposure and management, with UK investors for return.

UK institutions currently have €11bn in alternative indexing products, providing a straightforward and low cost solution.

In comparison, continental schemes favour advanced beta and risk smart beta strategies with allocations of €30bn and €21bn respectively.

“Demand in the UK market has been largely consultant‐led and has been driven primarily by investors looking to diversify away from passive allocations and for lower cost alternatives to poorly performing active strategies,” the report said.

This consultant-led demand is likely to fuel growth in the UK defined contribution (DC) market, but limited for the next few years until products transfer to DC platforms.

“Elsewhere in Europe, where cost is much less of a driver, and intermediaries are less influential, a greater emphasis is placed on the improved risk‐adjusted and more absolute return focus offered by risk smart beta products,” the report added.

Throughout 2013, advanced beta strategies witnessed the most allocations, predominately in the minimum variance space.

Advanced index approaches saw a surge of parity strategies while alternative index investing was dominated by single factor strategies.