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Guide to smart beta
Your IndustryApr 20 2016

From institutional beginnings to the retail market

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From institutional beginnings to the retail market

Smart Beta strategies have started out in the institutional space but are becoming adopted slowly by retail investors.

Martin Weithofer, head of strategic beta at Deutsche Asset Management, says: “The vast majority is institutional - a lot of institutional investors implement strategic beta strategies or portfolios on a bespoke basis.

“Retail investors are starting to look at strategic beta now, but it is early days for this market.”

Research from international analytics firm Cerulli Associates has said big-data platforms and better analytics were helping to grow the smart beta market by “broadening the investor base beyond sophisticated institutional clients”.

Total assets under management in smart beta portfolios in Europe has grown from €9.5bn (£7.6bn) in 2011, to €32bn (£25.6bn) at the end of 2015, Cerulli research claimed.

Moreover, advisers were often looking for lower-cost options for entry into smart-beta products, such as ETFs, which could be suitable for the retail market. Morningstar data shows Smart Beta exchange-traded funds made up 21 per cent of the total ETF market at the end of 2015.

Much of the historic demand has been from institutional clients. A US study carried out in 2015 by BBH Exchange Traded Fund Services, in partnership with ETF.com, found more financial advisers across the pond were considering using smart beta strategies for their clients.

It revealed 36 per cent of US advisers intended to increase the exposure of client portfolios to smart beta over the next 12 months, and not just in the institutional space.

Retail investors are starting to look at strategic beta now, but it is early days for this market Martin Weithofer

According to Vivian Tung, vice-president for BBH Exchange Traded Fund Services, “2015 was a great year for smart beta products.

“Smart beta usage and flows should continue to increase in the next five years as education on these products becomes more readily available to both institutional and retail investors.”

In the UK and Europe, too, smart beta strategies are gaining ground. Data from Invesco PowerShares in 2015 revealed wealth respondents and financial advisers were “increasingly turning” to smart beta as “an integral part of investor portfolios”, says Bryon Lake, head of Invesco PowerShares EMEA.

Some 9 per cent currently use it for their or their clients.

Particular outcomes

Dave Gedeon, vice-president and head of research and development, Nasdaq Indexes, says there is a clear trend among both institutional and retail investors picking up smart beta, but the reasons behind each party’s desire to get on board are different.

He explains: “Institutional investors are looking to achieve particular investment outcomes, such as gaining exposure to momentum stocks or large cap growth stocks.

“To do so, smart beta index-linked ETFs and mutual funds provide a superior approach as the strategies are rules-based and objective, so the institutional investor can have confidence his desired outcome will be delivered. 

“Retail investors are looking at smart beta as part of their holistic asset allocation strategies. Moving past just having a static equity/bond outcome, smart beta allows for enhanced returns while still achieving balanced portfolios.”

According to Chris Mellor, executive director, equity product management at Source, the most important thing, whether institutional or retail, is for the investor to understand what the product is trying to do, and what they can expect from it.

“This probably explains why institutional investors have already been using smart beta funds and why many retail investors are starting to investigate them. We expect to see an increased use by both types of investor in the coming year.”

Product development

There will also be more choice for retail investors as trends in product development at institutional level filter down.

In February this year, Cerulli Associates published the findings of a 2015 survey among institutional asset managers.

US financial advisers considering using smart beta strategies for their clients

Source: BBH Exchange Traded Fund Services, in partnership with ETF.com

It found 50 per cent of UK asset managers believed multi-factor smart beta products – those providing a range of strategies in one portfolio to achieve diversification – would become the most popular among institutions, and from thence to retail investors.

Justina Deveikyte, senior analyst at Cerulli, says: “Investors sitting in more cap-weighted passive implementations, or classic active management strategies, will be looking at the multi-factor smart beta strategies as suitable alternatives.

“These are cost-effective, transparent and more likely to live up to potential.”

Furthermore, as more ETF strategies are created to meet demand for smart beta, and retail investment platforms add these, availability will increase for retail investors.

Platform Novia has added Copia’s smart beta ETF portfolios. Bill Vasilieff, chief executive of Novia Financial, says: “The retail market is just at the beginning”.