An increasing number of pension schemes are adopting a more efficient way of investing.
Smart beta is shedding its tag as a niche investment strategy. Although not considered a mainstream ingredient by pension schemes when constructing a portfolio, more institutional cash is flowing into funds that track indices biased towards factors rather than the more traditional market cap benchmarks.
Indeed, exchange-traded funds (ETFs) provider iShares claims that half of institutional investors globally are using smart beta in their portfolios in the hope of generating higher returns for lower fees. In a sign of how rapidly appetite is increasing for the asset class, this figure expanded by 36% to 50% during 2017.
RPMI Railpen, asset manager for the Railways Pension Scheme, has allocated more than £700m to the asset class, while Hong Kong’s Hospital Authority Provident Fund Scheme (HAPFS) also has sizeable exposure to the market.
Demand is expected to continue climbing. At the start of this year, the smart beta market was worth $729bn (£548bn), representing 17% of all ETFs globally. Yet iShares believes that the value of the market will double to $1.4trn (£1trn) by 2022.
The most popular factors are reported to be fundamentals, income, low volatility, value, smaller companies, momentum and businesses with strong balance sheets and reliable revenues. Other more niche factors include emerging markets, credit spreads and commodity prices. It appears to be a question of if the market wants it; an asset manager will create it.
And creating it they are. Asset managers launched 67 smart beta ETFs globally in 2017.
Smart beta is part of a wider success story. It only accounts for 38% of the broader factor investing market, which is forecast to reach $3.4trn (£3.2trn) by 2022, up from $1.9trn (£1.4trn) at the start of this year. Expanding by 11% a year since 2011 makes factor investing one of the fastest growing areas of the asset management universe.
