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From institutional beginnings to the retail market

This article is part of
Guide to smart beta

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.”

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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, 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.

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.”