Faced with an increasingly difficult investment environment, a growing number of investors are looking to significantly increase allocations to smart beta strategies, according to a survey conducted by Invesco PowerShares.
The exchanged-traded fund provider spoke to 435 institutional and retail investors in six European markets, and found that allocation to smart beta strategies was expected to rise to 23% (from the current 13%) over the next three years.
The rise was linked to investors dealing with the challenges posed by low yields, scarce value and shorter investment horizons, the report said.
Mike Paul, head of Invesco PowerShares in Europe, the Middle East and Africa, said: “Smart beta has been one of the definitive market trends of the past decade with expectations for further strong growth driven by innovative approaches to challenges faced by investors such as low yields and finding value.”
He added: “Smart beta is no panacea, but it does have the potential to help with [these] major and emerging challenges.”
The report said that the persistent low interest rate environment had it made it tough for many investors to achieve low-risk returns, leading to shorter investment time horizons.
More than three-quarters of respondents (78%) said they felt under pressure to deliver portfolios with strong performance in a shorter timeframe, Invesco said.
The report – Smart beta strategies: more bricks for portfolio building – examined the drivers of smart beta adoption, the implementation challenges faced by current users, and the expectations for future allocation.
Well over half of institutional investors said they would be interested in smart beta in the fixed-income space with credit, corporate bonds and high-yield corporate bonds areas investors would consider investing in.
Paul added: “Attention must therefore be paid to further education, further product innovation, and – especially in the fixed income space – building partnerships with fund providers, if [investors’] expectations are not to be disappointed.”
In equities, Invesco said there were still plenty of opportunities with more than half of users saying they would consider smart beta exposure for Asia Pacific and emerging market equities.
Quality, momentum and multi-factor were the current leading strategies, with usage of these three strategies doubling from 2016 to 2017, particularly amongst retail investors.
Invesco said it had also noted increasing sophistication among smart beta users, with investors’ knowledge increasing in direct proportion to the length of their investment in smart beta.
There was also a noticeable shift from traditional, asset-based allocation to more risk-based allocation as knowledge increases.
Although smart beta was growing, there was entrenched scepticism amongst non-users in Invesco’s survey, over half of whom explained their reluctance as coming from a firm belief in active management.
However, some 42% of non-users said that they would consider deploying smart beta in the future, with traditional strategies their most likely route into the strategy.