Russell survey finds "smart beta" adoption rates, drivers in usage underpin latest step in evolution of investment management

• Adoption happening broadly in North America and Europe, especially among largest institutional investors.
  
• 53% surveyed with a smart beta allocation will increase it and 76% currently evaluating smart beta will make a new allocation in the next 18 months.
  
• Smart beta indexes being used by institutional investors across asset levels and geographies to pursue a wide range of desired investment outcomes. Canadian institutions favour low-volatility approaches.

TORONTO, April 30, 2014 /CNW/ - A new survey from Russell Investments finds that smart beta indexes are being sought by institutional investors for their investment utility, helping to achieve broader portfolio objectives such as risk reduction and return enhancement more than basic cost savings. This is especially true among those managing more than US$10 billion (35% of those surveyed).

In Canada, almost all (95%) of institutions surveyed believe investment strategy is an appropriate application for smart beta, compared to 70% among non-Canadian responders. Furthermore, nearly a third (30%) of Canadian plans are currently evaluating smart beta strategies, compared to 11% of non-Canadian respondents.

Institutional investors may debate what to call alternatively weighted or factor-based indexes, but adoption among the largest institutional investors is clearly strong, growing and broad-based according to a new Russell global institutional market survey, entitled Smart Beta: A Deeper Look at Asset Owner Perceptions. The survey, fielded earlier this year, confirms that institutional investors in North America and Europe are actively using smart beta indexes in strategic and tactical ways to pursue a variety of investment outcomes.

Across North America and Europe, institutional investor use of smart beta indexes and smart beta index-based investment strategies is diverse, from use as market benchmarks to tools to controlling unwanted exposures or for emphasizing certain investment factors in global multi-asset portfolios.

The survey, conducted in the first quarter by Russell's index business, focuses exclusively on institutional investors in North America and Europe. It included input from nearly 200 equity investment decision makers across a broad spectrum of pension plans, endowments and foundations of different asset sizes and regions and in different stages of their evaluation and adoption of smart beta.

Of the 181 survey respondents, twenty-four (13%) were Canadian investors. Of the Canadian respondents, 80% have assets greater than $1 billion and 20% have assets above $10 billion, and 80% have defined benefit plans. The goal of the survey was to gain a better understanding of the perceptions and levels of adoption of smart beta strategies within these important investor populations.

"Our survey confirms that we've clearly reached a new stage in the evolution of investment management. Smart beta indexes and investment strategies are gaining traction among asset owners because these highly sophisticated investors are finding value in their investment outcomes and characteristics," said Rolf Agather, managing director of global index research and innovation for Russell Investments. "However, effectively integrating smart beta strategies within a broader portfolio requires that investors maintain standards of assessment and ongoing review similar to those associated with any active strategy."

Added Greg Nott, chief investment officer for Russell Investments Canada Ltd., "Indicative of the current pension landscape in Canada, survey findings indicate that Canadian investors are most interested in smart beta indexes for volatility control and risk reduction. The results of this new survey reinforce that institutional investors' growing interest in and adoption of smart beta strategies has driven the need for additional information, education and advice on how to best implement these strategies."

Other key findings include:

Broad adoption and strong interest in smart beta among institutional investors, especially among the largest ($10 billion plus in assets) and especially in Canada

• Almost a third (30%) of Canadian respondents are currently evaluating smart beta strategies, compared to 11% of non-Canadian respondents.
• 88% of all survey respondents with more than $10 billion in assets have evaluated smart beta or plan to do so in the next 18 months; 77% of all respondents with assets between $1 billion and $10 billion, and 50% of those with assets under $1 billion responded similarly.
• 32% of all survey respondents currently have smart beta allocations and, of these, 53% expect to increase their allocation and only 5% plan to reduce it in the next 18 months.
• For survey respondents currently evaluating smart beta, or planning to evaluate its use in the next 18 months, 76% expect to make an allocation.

Smart beta indexes being used primarily to pursue investment outcomes, with Canadian respondents gravitating toward low-volatility strategies

• Risk reduction and return enhancement ranked at the top of the list of investment objectives that motivated all survey respondents' evaluation of smart beta strategies, with more than 60% attributing their evaluation to each of these two investment objectives. The greatest unmet need cited by survey respondents is for smart beta indexes that help control factor exposures.
• Cost savings, cited just 15% of the time, ranked at the bottom of the list of motivating factors.
• Low-volatility and fundamentally weighted index strategies dominate on institutional investors' radar globally, but there are large regional differences in which strategies are more popular and how they are used. For example, all of the Canadian respondents who are currently using smart beta indexes are using low-volatility strategies, versus less than half (48%) of non-Canadian respondents using these strategies. And 86% of those Canadian investors surveyed who are evaluating smart beta indexes are evaluating low-volatility strategies, compared to 64% outside Canada.
• Among Canadian investors surveyed, risk reduction was cited 86% of the time as an objective leading to evaluation of smart beta strategies, while return enhancement was cited 43% of the time. This compares to 59% for risk reduction and 65% for return enhancement among non-Canadian respondents.

There is no agreement on "name," and smart beta definitions vary by region and asset size

• In North America, the most popular name was "alternatively weighted indexes" (33% of survey respondents preferred this name) while, in Europe, "smart beta" is the preferred name (35% of respondents).
• When segmented by size, "alternatively weighted indexes" is most popular among owners of assets under $1 billion, "smart beta" and "alternatively weighted indexes" are essentially tied among owners of assets between $1 billion and $10 billion, and "smart beta" wins among owners of assets exceeding $10 billion.

About the Survey

Russell Indexes conducted this survey to gain better insight into the adoption and perception of smart beta by asset owners globally to help provide additional insights for investors considering the use of smart beta strategies in their portfolios. The survey was conducted between January 22nd and February 20th 2014. Survey participants included 181 asset owners with at least U.S.$200m in AUM in the United States, Canada, Europe, and the Middle East.  

For more information, go to the new smart beta landing page on the Russell Investments website.

About Russell Investments

Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell stands with institutional investors, financial advisors and individuals working with their advisors—using the firm's core capabilities that extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes to help each achieve their desired investment outcomes.

Russell has more than CAD$286.7 billion in assets under management (as of 3/31/2014) and works with over 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has US$2.4 trillion in assets under advisement (as of 6/30/2013). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than US$1.6 trillion in 2013 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, including more than 80 countries and more than 10,000 securities. Approximately US$5.2 trillion in assets are benchmarked (as of 12/31/2013) to the Russell Indexes, which have provided investors with 30 years of smarter beta.

With Canadian headquarters in Toronto, Russell operates globally, including through its headquarters in Seattle, Washington and offices in New York, London, Paris, Amsterdam, Sydney, Melbourne, Auckland, Singapore, Seoul, Tokyo, Beijing, Toronto, Chicago, San Diego, Milwaukee, Montreal, Edinburgh and Vancouver. For more information about how Russell helps to improve financial security for people, visit www.russell.com or follow @Russell_News.

Russell Investments is a Washington, USA Corporation, which operates through subsidiaries worldwide and is a subsidiary of The Northwestern Mutual Life Insurance Company. Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985. Russell Investments Canada Limited and its affiliates, including the Frank Russell Company, are collectively known as "Russell Investments."

Russell Investments is the owner of the trademarks, service marks and copyrights related to the Russell Indexes used under a license by Russell Investments Canada Limited.

Nothing in this publication is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This information is made available on an "as is" basis. Russell Investments Canada Limited does not make any warranty or representation regarding the information.

Copyright © Russell Investments Canada Limited 2014. All rights reserved.

SOURCE: Russell Investments Canada Limited

Beja Rodeck, 905.885.5945 or [email protected]; Tim Benedict, 212-702-7823 or [email protected]; For real-time news updates, follow @Russell_News on Twitter.