Invesco Powershares’ European investor report finds smart beta usage increasing across Europe
The Invesco Powershares’ European investor research report for 2017 reveals that smart beta strategies are helping investors face the challenges of the investment market.
The report, entitled ‘Smart beta strategies: more bricks for portfolio building’, reports that challenges such as low yields, hard to find value and shorter time horizons are making it more and more difficult for professional investors to achieve their clients’ objectives.
Industry practitioners in six European markets were consulted – portfolio managers, Chief Investment Officers, fund selectors and fund analysts. The firm writes that only around one in five of the over 400 respondents, from the UK, Germany, Italy, Switzerland, the Netherlands and France, do not yet use smart beta, adding that smart beta usage is increasing across Europe, and that strategies are becoming more sophisticated.
Mike Paul, Head of Invesco PowerShares EMEA, says: “The life of a professional investor is not getting any easier. Clients’ investment horizons are contracting, portfolio reviews are becoming more frequent and risk management is becoming as important as returns in an uncertain world. Smart beta is no panacea, but it does have the potential to help with major and emerging challenges such as low yields and finding value. Smart beta users are clearly recognising these benefits, not only increasing their allocations but becoming more sophisticated the longer they are invested.”
Key findings in the report include the fact that short-termism is on the rise, with more than three quarters of respondents experiencing pressure to deliver portfolios that perform strongly in a shorter time frame. Demand for monthly portfolio performance reviews is surging, too. Professional investors are increasingly turning to smart beta as an approach to achieving their clients’ investment objectives in this environment.
Low yields, the need to find value, and correlation of assets are the most significant challenges identified by professional investors, the survey found. The firm writes: “We are seeing increasing sophistication amongst smart beta users. As the length of their investment in smart beta increases, their knowledge is growing. They become more expert and take a more sophisticated approach to investing. There is a noticeable shift from traditional, asset-based allocation to more risk-based allocation as knowledge increases.”
The report also found that the decision to adopt smart beta strategies is primarily proactive, based on conviction and the desire for diversification. Both of these have been identified by almost half of all users. And, as users become more expert, the importance of conviction in decision-making rises while the desire to diversify becomes less significant.
The strategies that users are looking for are changing. Looking at retail professional investors, in particular, momentum, quality and multi-factor strategies are booming, with usage of these three strategies almost doubling from 2016 to 2017.
Although most users are still focussed on equity asset classes, there is growing interest for smart beta in the fixed-income area. The survey found that well over half of institutional investors would consider allocating to fixed-income smart beta strategies.
The report find that the outlook is positive and user satisfaction is extremely high. Some 97 per cent of users report that smart beta allocations are meeting or exceeding expectations, and three out of four plan to increase their allocations. Even more would recommend smart beta to colleagues.
The report concludes that although smart beta is growing, there is entrenched scepticism amongst non-users, over half of whom explain their reluctance as coming from a firm belief in active management. Future growth depends on education, communication and product development to address the challenges of smart beta and the concerns of non-users.