Investment in smart beta more than doubled in 2013, according to client research by Towers Watson.
The consultant said its clients made over twice as many new investments in smart beta strategies last year, allocating around $11bn across more than 180 portfolios, compared to the year before (around $5bn across almost 130 portfolios).
Its institutional investment clients globally have now allocated over $32bn to smart beta strategies to almost 500 portfolios, across a range of asset classes.
Towers Watson global head of investment research Craig Baker said he was not surprised by the rapid increase in popularity, but expressed concern about the sharp rise in new products being sold under the smart beta banner.
“It is no surprise to us that smart beta strategies are being implemented at this rate, given their inherent relevance for most institutional investors,” added Baker. “Interestingly it has taken some time to get to this point given that we started developing the concept in 2000 as part of our work on structured alpha, and then in more detail in 2002 as beta prime.
“While it is satisfying that our clients have been able to benefit first from a range of smart beta strategies, we are somewhat concerned about the proliferation of products now on the market that claim to be smart beta, particularly in the equity area.”
The data also shows that last year Towers Watson’s clients – which include pension funds, sovereign wealth funds and insurance companies – carried out alternative asset class selections worth more than four times as much (over $12.5bn) than they did five years ago. Among alternatives, real estate attracted the most interest (over $4bn) in 2013, with one quarter of that in smart beta, followed by direct hedge funds (over $3bn). Infrastructure also proved popular with more than $2bn allocated over the year, a third of which was through smart beta strategies. In the same period, direct private equity attracted around $1.5bn, while illiquid credit (distressed debt and lending) attracted about $1bn in assets, Towers said.
Baker added: “Throughout the past five years the alternative fund managers that we have put into client portfolios have shown their ability to adapt to the changing environment to generate good net-of-fees performances.
“Larger institutional funds are likely to continue to invest in funds directly for most alternative asset classes rather than via funds of funds as investors continue to focus on better fee structures, greater transparency and smart beta options. Indeed, there were only three FoHF mandate selections in 2013, which is a demonstration of this point.”
According to the data, bond selections by Towers Watson’s clients in 2013 totalled $22bn, of which the majority were invested in global (around $11bn) and US (around $5bn) mandates, followed by emerging market mandates (around $3bn). In 2013, the total number of multi-region bond selections exceeded the combined total of all single-region bond mandates.
Craig Baker said: “These figures confirm a longer-term trend of investors seeking greater efficiency, diversification and diversity in bond mandates, for example favouring global solutions over a home market bias and an increasing acceptance of alternative credit asset classes into the strategic asset mix.”
In equities, global mandates, totalling around $10bn, continued to be the most popular with Towers Watson’s clients in 2013, followed by US equity (around $3bn), Global ex US equity and US small / mid cap equity mandates (each around $2bn). In total, equity mandate selections last year accounted for around US$24bn in assets.
“These figures confirm an established trend of investors investing away from local markets, as they seek to diversify their portfolios more globally,” said Baker. “Interestingly the number of equity smart beta mandates doubled in 2013, and tripled in size of assets, compared to the year before.”
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