More than 40% of investors across the US and Europe are already allocating to smart-beta investment strategies, according to new research by State Street Global Advisors (SSgA), as a further one-quarter contemplate allocation.

While just under one-fifth (17%) remain sceptical on the latest investment process, its up-and-coming nature is cemented among State Street’s 300 institutional investors.

Two-thirds of respondents, mainly from public and private pension schemes, insurance companies, endowment funds and foundations, said they felt the strategy was here to stay.

Smart beta – the term used to describe equity or fixed income investing that follows a systematic, rules-based strategy to achieve exposure to beta factors – has been growing in popularity.

It differs from traditional passive investment by exposing investors to higher risk levels, but targeted, to ensure beta is extracted.

It also provides returns on a much more cost-effective basis than active management.

In a concern for both active and passive managers, the respondents to the survey said their move towards smart beta could be at the expense of both investment styles.

Some three-quarters said they saw smart beta as a viable replacement to index linked strategies, where 64% said similar for active.

Investors cited a number a reasons for their growing interest in the strategy.

Concerns over traditional cap-weighted indices in passive investments were one, as was disappointment with the costs and performance of active managers.

Among the pull factors, State Street said, was investors’ appetite to reduce risk, while better risk-adjusted returns was also key.

Investment consultants also had a hand, as 51% said professional advice was the main reason to invest in smart beta.

Towers Watson highlighted in its own report the benefit of smart beta when used in equity portfolio construction.

The report said, when used effectively, the strategy can help reduce poor active management, specifically those managers that are closet or style index followers.

It also provides the capacity to remove investment bias by using a variety of active managers, as well as improving the scope of investor governance.

Within the different smart-beta strategies available, State Street said, low valuation – where stocks are chosen on their discount basis – and low volatility – which picks stocks that have shown low levels of risk over time – were the most common.

Close behind was the equal weighting method, which replaces the cap-weighted model to equal investments across the index, and momentum, which picks recently well-performing stocks.

However, the multi-factor smart-beta strategy has gathered the most interest among investors, as 65% said it was under consideration.

Only 9% currently invest, however.

In a general reversal of institutional investment trends, the smart-beta strategy has taken a stronger hold in Europe, compared with the US.

The survey found one-quarter of European respondents had at least 20% of their equity portfolios invested in a smart-beta strategy, compared with 4% across the Atlantic.

Awareness of smart beta also differed.

Some 70% of European investors had a strong awareness, with only 57% suggesting likewise in the US.

Kristi Mitchem, SSgA’s vice-president for institutional clients in the US, said that, despite it being an early trend, it was one not to ignore.

“Investors are becoming aware that similar returns can be achieved at a lower cost than traditional active management,” she said.

For more on smart beta, see the supplement in the upcoming March edition of IPE