Smart beta: 2017 global survey findings from asset owners
FTSE Russell
May 22, 2017
How much higher can smart beta adoption climb? Now in its fourth year, FTSE Russell’s latest annual survey of global institutional asset owners indicates that smart beta adoption is at an all time high and that investors continue to find new applications for its use.
The survey, Smart beta: 2017 global survey findings from asset owners, reveals that the percentage of asset owners reporting an existing smart beta allocation has reached a new peak of 46%, up from 36% last year. The trend over the past three years shows that increasing global growth and adoption of smart beta is continuing in 2017, with adoption of smart beta in Europe still greater than in North America and Asia Pacific, with 60% of asset owners reporting an allocation.

Life Cycle Investing and Smart Beta Strategies
Bill Carson (BlackRock), et al.
March 30, 2017
In traditional life cycle models, the equity-bond glide path shifts investment allocation from riskier assets to relatively safer assets as investors approach retirement. In this paper, we develop a smart beta glide path which seeks to take advantage of broad, persistent patterns within asset classes to identify securities with higher risk-adjusted returns than the market. Within equities, investors can shift from return-enhancing strategies — like value, momentum, size, and quality — to risk-reducing strategies like minimum volatility as they move through their life cycles. Adopting smart beta glide paths may improve Sharpe ratios by up to 20% over a standard equity-bond glide path.

Factors vs. Sectors in Asset Allocation: Stronger Together?
Marie Briere (Amundi Asset Mgt) and A. Szafarz (U. Libre de Bruxelles)
May 2017
This paper compares and contrasts factor investing and sector investing, and then seeks a compromise by optimally exploiting the advantages of both styles. Our results show that sector investing is effective for reducing risk through diversification while factor investing is better for capturing risk premia and so pushing up returns. This suggests that there is room for potentially fruitful combinations of the two styles. Presumably, by combining factors and sectors, investors would benefit both from the diversification potential of the former and the risk premia of the latter. The tests reveal that composite strategies are particularly attractive; they confirm that sector investing helps reduce risks during crisis periods, while factor investing can boost returns during quiet times.

How Do Smart Beta ETFs Affect the Asset Management Industry? Evidence from Mutual Fund Flows
Jie Cao (Chinese University of Hong Kong), et al.
May 2017
We examine the impact of non-market-tracking (smart beta) equity exchange-traded funds (ETFs) on how investors evaluate mutual fund performance. We rely on mutual fund flow sensitivity to alphas from different asset pricing models to measure investor behavior. Our empirical results show that when such ETFs are actively traded, fund flow sensitivity to alphas from multi-factor models increases. The dominance of CAPM alpha weakens and even disappears during the high-trading volume period of such ETFs. The results, which are robust to different empirical methods, are not caused by market-tracking ETFs or index mutual funds. The evidence is more pronounced among funds with high exposure to non-market risks and funds with more sophisticated investors.

Survey of Quality Investing
Jason C. Hsu (Rayliant Global Advisors), et al.
May 19, 2017
Factor investing has experienced a resurgence in popularity under the moniker “smart beta.” Several traditional factors, such as value, size, momentum, and low beta, are well defined and have been heavily researched in academia as return anomalies for many decades. These factors have also been exploited by practitioners as quantitative strategies for enhancing returns. Today, these factors each define a distinct smart beta category (think of style boxes for smart beta strategies) and are the foundational building blocks for the now-ubiquitous multi-factor products.