Sovereign Funds Pull Money From Active to Invest in Smart Beta

(Bloomberg) -- Sovereign-wealth funds and insurers are looking to allocate more money to so-called smart-beta funds and other quantitative strategies over the next five years as they seek better returns for less risk, according to an Invesco Ltd. survey.

Institutional investors expect to increase their allocations to what's known as factor investing to 18 percent by 2022, up from 12 percent now, the survey shows.

Retail investors are also getting involved and anticipate allocating 17 percent of their funds to such strategies in five years' time, versus 8 percent today. The survey involved 108 respondents from around the world, overseeing more than $7 trillion in assets.

Smart beta and other factor-investing strategies use quantitative, or computer-driven, models in an attempt to deliver market-beating returns for the sort of fees usually charged for passive, index-following funds.

“It's very much on the agenda for many people,” Georg Elsaesser, a member of Invesco's quantitative-strategies team, said in an interview. “A lot of money is coming from passive funds to enhance returns and a lot is also coming from traditional active funds too.”

Demand for factor investing is already on the increase, with allocations across the buyside rising to 14 percent from 12 percent last year, the survey shows. All key institutional and retail segments and geographies saw an increase. A separate report by Citigroup Inc. last year estimated that demand for lower fees will see smart-beta funds swell to $1.2 trillion by 2019.

Respondents to Invesco's survey cited reducing risk as the main reason for allocating funds to factor-based products, followed by returns and cost reduction. Invesco said the money is currently invested in equity products, but that there's growing demand for factor-based products in other asset classes including fixed income and multi asset.

“Factor investing has become the third pillar in equity investing alongside passive and traditional active,” said Elsaesser. “Insurers have been early movers and sovereign-wealth funds are also very prominent.”

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

To contact the editors responsible for this story: Neil Callanan at ncallanan@bloomberg.net, Paul Armstrong