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Smart beta potential in Asia

Lack of peer adoption makes investors reluctant to use smart-beta ETFs, says State Street Global Advisors.

There are only a handful of smart-beta Exchange Traded Funds (ETFs) listed in Asia, and the few investors that are keen to add spice to their passive strategies use European or US domiciled vehicles, according to Matthew Arnold, SSGA Apac head of ETF research.

“Lack of peer adoption” is the biggest inhibitor to a greater take-up by Asia Pacific institutional investors, with nearly a quarter providing this chicken and egg explanation, a recent State Street Global Advisors survey has found, which polled 400 institutional investors globally in the second half of 2015.

Another 23% complained that they saw “difficulties in explaining the theory behind smart-beta”.

The result is that Asia Pacific institutional investors deploy the strategy “for a mere 6% of their equity assets, well below the global average of 10%,” said Arnold.

But in the current low interest rate environment and amid the continuing global trend to cut costs, more investors might be tempted to gain smart-beta exposure “to add a little bit of value,” he added.

If investors start experiencing muted future returns they could lose confidence in the ability of active managers and seek alternative ways to boost performance, he said.

“Globally, the initial interest in smart-beta is primarily driven by institutional investors, such as the largest pension schemes,” said Arnold.

“Within Asia Pacific, I think the increase in private banks’ discretionary portfolio management services, where they develop more outcome-focused and specialised solutions, such as absolute return, would tie up [well] with smart-beta ETFs.”

Already, dividend-weighted ETFs are among the most popular products offered by private banks both globally and in Asia, he added.

However, institutional investors in the region still need convincing. Only 9% of Apac respondents said they were planning to increase smart-beta exposure in their equity portfolio, compared with 14% worldwide, according to the survey.

Part of the Mark Allen Group.