LONDON, Wednesday 19 February, 2014 – Towers Watson’s clients made over twice as many new investments in smart beta strategies during 2013, around $11bn across over 180 portfolios, compared to the year before (around $5bn across almost 130 portfolios) according to global data from the company. Towers Watson’s institutional investment clients globally have now allocated over $32bn to smart beta strategies to almost 500 portfolios, across a range of asset classes.
Craig Baker, global head of investment research at Towers Watson said: “It is no surprise to us that smart beta strategies are being implemented at this rate, given their inherent relevance for most institutional investors. Interestingly it has taken some time to get to this point given that we started developing the concept in 2000 as part of our work on structured alpha, and then in more detail in 2002 as beta prime. While it is satisfying that our clients have been able to benefit first from a range of smart beta strategies, we are somewhat concerned about the proliferation of products now on the market that claim to be smart beta, particularly in the equity area.”
The data also shows that last year Towers Watson’s clients – which include pension funds, sovereign wealth funds and insurance companies – carried out alternative asset class selections worth more than four times as much (over $12.5bn) than they did five years ago. Among alternatives, during 2013, real estate attracted the most interest (over $4bn), where one quarter is in smart beta, followed by direct hedge funds (over $3bn), followed by infrastructure (over $2bn) where one third was in smart beta strategies. In the same period, direct private equity attracted around $1.5bn, while illiquid credit (distressed debt and lending) attracted about $1bn in assets.
Craig Baker said: “Throughout the past five years the alternative fund managers that we have put into client portfolios have shown their ability to adapt to the changing environment to generate good net-of-fees performances. Larger institutional funds are likely to continue to invest in funds directly for most alternative asset classes rather than via funds of funds as investors continue to focus on better fee structures, greater transparency and smart beta options. Indeed, there were only three FoHF mandate selections in 2013, which is a demonstration of this point.”
According to the data, bond selections by Towers Watson’s clients in 2013 totalled $22bn, of which the majority were invested in global (around $11bn) and US (around $5bn) mandates, followed by emerging market mandates (around $3bn). In 2013, the total number of multi-region bond selections exceeded the combined total of all single-region bond mandates.
Craig Baker said: “These figures confirm a longer-term trend of investors seeking greater efficiency, diversification and diversity in bond mandates, for example favouring global solutions over a home market bias and an increasing acceptance of alternative credit asset classes into the strategic asset mix.”
In equities, global mandates, totalling around $10bn, continued to be the most popular with Towers Watson's clients in 2013, followed by US equity (around $3bn), Global ex US equity and US small / mid cap equity mandates (each around $2bn). In total, equity mandate selections last year accounted for around US$24 billion in assets.
Craig Baker said: “These figures confirm an established trend of investors investing away from local markets, as they seek to diversify their portfolios more globally. Interestingly the number of equity smart beta mandates doubled in 2013, and tripled in size of assets, compared to the year before.”
Manager selection activity globally at Towers Watson exceeded 920 selections in 2013; reflecting around US$79bn of assets moved for around 300 clients. This compares to assets moved of around US$68bn, for around 690 selections, five years ago.
Towers Watson Investment
Towers Watson Investment is focused on creating financial value for the world’s leading institutional investors through its expertise in risk assessment, strategic asset allocation, fiduciary management and investment manager selection. Towers Watson’s Investment business has around 800 associates worldwide, assets under advisory of over US$2 trillion and over US$60bn of assets under management.
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has more than 14,000 associates around the world.