European investors pumped more than €30bn into ‘smart beta’ investments in 2014, with research suggesting institutional investors accounted for almost two-thirds of the overall market.
Figures from UK research firm Spence Johnson showed that the Continental European market topped €132bn by the end of last year, and predicted annualised growth of 21% over the next five years.
It also said institutional investors would see their market dominance diminish over time, with the research suggesting retail investors would account for 42% of the €340bn market by 2019.
Spence Johnson, supported by research by CAMRADATA, separated smart beta strategies into single factor, multi factor, minimum variance and parity strategies.
There are three approaches to these strategies called ‘advanced beta’, advanced index’ and ‘alternative index’, with the component of active management diminishing through the list.
The latest market growth is driven by single-factor mandates and allocations to minimum variance strategies, specifically into the more passive alternative index space of the smart beta market.
The report said single-factor assets grew to €50bn from €39bn, mostly allocated to alternative index approaches.
There is now €10bn in minimum variance strategies, an increase of 56% from 2013.
“Our predictions,” Spence Johnson said, “suggest minimum variance strategies will be the fastest growing smart beta product type for both institutional and retail/wholesale investors.”
Net inflows into the advanced beta approach fell over 2014, except for those into minimum variance strategies.
Flows into alternative index approaches rose across all strategies, suggesting investor preference for the more passive, and inherently cheaper, products.
However, Spence Johnson said that, while investors’ cost cutting was a major driver of growth in smart beta products, inflows into advanced beta (minimum variance) suggested it was not the primary focus.
“This observation,” the report said, “is supported by survey evidence that lists factors such as return enhancement, risk diversification and even a desire to complement traditional active or passive allocations all ranked higher than cost as key drivers for both institutional and wholesale investors.”
Spence Johnson also said the market remained equity focused, with slow innovation for products in other asset classes, particularly fixed income.
eVestment, the institutional investment data provider, only lists nine unique ‘smart beta’ or ‘enhanced index’ strategies for fixed income, dwarfed by its own traditional market, and equity smart beta.
Equity accounted for 79% of total smart beta assets, but the research firm said evidence of demand for fixed income products led it to expect strong growth of the market, estimated to be 35% per year until 2020.
The research, separating Continental and UK investors, suggested UK allocations were more focused on single-factor index products – but there were also signs of a growing demand for low-volatility strategies.
European investors use risk-weighted approaches more, with €26bn in minimum variance and €18bn in risk parity products.
“Historically, UK investors have favoured simple single-factor strategies, with an estimated €26bn,” Spence Johnson said.
“Evidence from UK consultants, however, suggests demand for low volatility approaches is growing among UK institutional investors concerned about the high levels at which current equity markets are trading.”
To read more on pension funds’ smart beta strategies, see this month’s On The Record
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