Customised beta approaches good for SRI – Northern Trust

GLOBAL - European institutions use customised beta to better comply with socially responsible investment (SRI) criteria and increase transparency across their portfolios, a new report by Northern Trust has shown.

The company's survey - 'Customised Beta: Changing Perspectives on Passive Investing' - found that such strategies were only slowly emerging from their "infancy".

But it added that 49% of respondents would consider the approach, with the figure rising to 51% if other countries outside Europe were included.

John Krieg, Northern Trust's managing director of asset management in the EMEA region, said interest in the strategies would grow as more was published about the implications of customised beta.

"In the future, we would expect to see institutional investors devoting more time and considering a broader range of approaches when selecting indices, as investment managers and consultants educate them about the potential benefits of customised beta and as investors see the approach being successfully applied by their peers," he said.
 
However, the survey argued that one of the "clearest" uses for customised beta would be within the SRI and environmental, social and governance (ESG) approach, noting that achieving an investor's goals within a cap-weighted portfolio was not always possible.

It said: "By customising a benchmark through exclusions or tailored indices and then managing to it passively, investors can then achieve index exposure with their SRI or ESG needs without the potential costs associated with managing actively."

It added: "European institutions see customised beta strategies as having the potential to boost transparency within their passive portfolios at a time of increasing oversight and regulation."