Smart-beta allocations are still restricted to pension funds with greater resource, despite their being seen as a middle ground between passive and active equity allocations, according to research by Russell Investments.

Russell’s survey of global institutional investors found that only 9% of pension funds managing less than $1bn (€722m) had smart-beta allocations, compared with 46% for those with more than $10bn in assets. 

Close to half of these smaller funds also stated no plans to start evaluating allocations to the range of strategies, while around a tenth ruled out allocations altogether.

Across all scheme sizes, 32% have allocations, with around one-tenth ruling out any movement into the space.

Of those yet to evaluate smart beta, the most common reason cited was a lack of belief it provided any investment merit, stated by 41% of schemes.

One-third (32%) said it was because consultants were yet to recommend the option, while one-quarter (24%) cited a lack of resource.

The institutions responding to the survey also disagreed on the definition of smart beta, although, amid the ongoing debate, a consensus is forming.

Some 45% of respondents said smart beta could be defined as an alternative way to construct market exposures, whereas 22% said it was any index exposure not based on traditional market-cap weightings.

While smart beta can be used across both equity and fixed income asset classes, the research focused on usage within shareholdings.

The majority of respondents (62%) still only have less than 10% of their equity exposure run under smart-beta strategies, while 18% have more than 20%.

However, half of those with allocations expect to increase this in the near future, with around 42% maintaining their set up.

This combines with more than three-quarters of schemes currently evaluating allocations expecting to make one within the next 18 months.

Of those choosing not to implement a smart-beta strategy, the most common reason was a limited track record from managers, stated by 35% of respondents.

The research also found a growing divide in the perception and take-up of smart-beta strategies across Europe and North America.

While 40% of European institutions responding have allocations, this fell to 24% in North America.

More than 30% of North American investors said they did not anticipate making allocations in the next 18 months, while the proportion evaluating and deciding not to implement was broadly equal between the two regions.

Sorca Kelly-Scholte, managing director for client strategy and research, said the research showed the strategy was very much still in its infancy.

“The results also confirm that outcome-orientated European investors are embracing smart-beta index tools,” she said.