Beyond Active and Passive SNAPSHOT: THE STATE OF

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1 Beyond Active and Passive SNAPSHOT: THE STATE OF Advanced Beta IN EUROPE. A research report sponsored by State Street Global Advisors.

2 Advanced Beta is the Latest Stage in the Evolution of Indexing Advanced Beta, sometimes also referred to as smart beta, has quickly established itself in today s investment universe and these innovative approaches have proliferated in recent years. Generically, these are rules-based, transparent investment processes that look to isolate factors that have been shown to outperform market-cap-weighted indexes over time. The majority of these indexes seek to enhance returns or minimize risk relative to a traditional market-cap-weighted benchmark. Others seek to address certain oft-cited drawbacks of standard benchmarks such as concentration in equity cap-weighted indexes or the overweighting of the most indebted issuers that is prevalent in marketcap-weighted fixed income benchmarks. These strategies can exploit many of the same sources of return (e.g. size, value, quality, momentum) that active managers target or seek to mitigate risk in a similar manner. As the distinction between active and passive investing begins to merge, Advanced Beta strategies are experiencing unprecedented growth. Morningstar Investment Consulting France analyses the current fund landscape in Europe. 2

3 Advanced Beta Funds are Gaining Popularity in the Market In early 2015 Morningstar conducted an in-depth analysis of the European Advanced Beta listed fund universe on behalf of State Street Global Advisors. This analysis uses the Morningstar taxonomy for grouping open-ended funds into Advanced Beta categories to give a unique look into the current European landscape for these funds. Initially developed for institutional needs and available under mandate or dedicated funds formats, the industry has moved to the next stage with Advanced Beta offering increasing numbers of open-ended funds. Advanced Beta funds in Europe have grown both in absolute numbers and by assets gathered. Sophisticated investors have been using Advanced Beta for quite some time but the range of accessible Advanced Beta funds in Europe has seen incredible growth in recent years. The number of Advanced Beta funds is growing almost as quickly as research firms can come up with new strategies and new indexes to track. At least some of their growth can be attributed to rising doubts about the effectiveness of active management and awareness around some of the weaknesses of market cap-weighting. But Advanced Beta indexes are not designed to replace traditional market-capitalization-based indexes. Rather, they are a complement to the existing indexes and active strategies available to investors, allowing for finer cuts on market exposure, factor exposure and portfolio-weighting approaches. They re a new key on the piano for investors. In the following pages we demonstrate just how extensively this area has grown, where the current focus is and give insight into where it is likely to be in the near future. Snapshot: The Advanced Beta Marketplace 3

4 The Most Popular Asset Classes Advanced Beta is a market clearly driven by equity: with almost 62 billion in equity via 246 funds, almost the size of the entire category the year before. Over 85% of total assets are invested in these products. AUM in this category grew 39% versus 2013 year-end levels, after equally impressive growth in previous years. Global Broad Category # of funds 2013 # of funds Assets in bn 2013 Assets in bn Market share 2013 (%) Market share (%) Equity Commodities Fixed Income Alternative Allocation Miscellaneous Total Advanced Beta Fund Numbers by Asset Class Commodities 35 Fixed Income 27 Alternative 20 Allocation 14 Miscellaneous 3 Equity Funds 246 4

5 Recent years have seen tremendous asset growth within European funds From around 2004, with the development of fundamental index strategies, Advanced Beta truly began to grow aggressively. Before this period, some High Dividend strategies were available but the terms Smart or Advanced Beta were not then in widespread usage. The actual number of funds has almost tripled in 5 years: from 123 funds to 345 funds. Advanced Beta Growth by Asset Class 2000 bn Miscellaneous Allocation Alternative Fixed Income Commodities Equity Advanced Beta Growth by Asset Class 2000 Assets in bn Equity Commodities Fixed Income Alternative Allocation Miscellaneous Total Number of funds Equity Commodities Fixed Income Alternative Allocation Miscellaneous Total Snapshot: The Advanced Beta Marketplace 5

6 Growth Galvanised After the Global Financial Crisis Interest in Advanced Beta was further fuelled by the Global Financial Crisis. The Crisis prompted many investors to become more focused on controlling risks rather than simply maximising their returns. While there is no one, single reason that explains the recent rise of these strategies, their growth is often attributed to rising doubts about the effectiveness of active management, the ever-increasing desire to keep a lid on investment management fees, and investors growing awareness of the weaknesses of market-cap weighting. Advanced Beta Asset Class Growth by Euro Post-GFC bn +356% Miscellaneous Allocation Alternative Fixed Income Commodities Equity 16bn 22bn 25bn 38bn 52bn 73bn Source: Morningstar, as of 31/12/14 Advanced Beta Asset Class Growth by Fund Numbers Post-GFC Number of funds Miscellaneous Allocation Alternative Fixed Income Commodities Equity % Source: Morningstar, as of 31/12/14 6

7 As at end December 73 billion is invested in Europe leads the way on Advanced Beta. 346 funds 345 funds from 2009 value of assets up 356% Advanced Beta in Europe has seen explosive growth in recent years: from less than 2 billion in 2004 to nearly 73 billion at end December. An increase of 3550% in a decade. to number of funds up 181% Snapshot: The Advanced Beta Marketplace 7

8 Which Strategies are the Most Popular? Under Morningstar classification the most popular strategies in Europe are Low Volatility/Equal Weight. There was more than 26 billion invested in 106 funds, as at the end of. Next come Dividend and Fundamental Weight strategies, with over 22 billion and 18 billion, respectively. In terms of number of funds, however, the Fundamental Weight strategies had nearly 1.5 times more funds than dividend strategies (97 vs 68). Despite a relatively significant number of funds (43) the enhanced futures strategy collected only 1.83 billion in assets less than the maximum diversification strategy, with a mere 13 funds available for sale. Assets by Advanced Beta Strategy 2013 vs Advanced Beta Strategy # of funds 2013 # of funds Assets in bn 2013 Assets in bn Market share % 2013 (%) Market share % (%) Low Volatility / Equal Weight Dividend Fundamental Weight Enhanced Futures Strategy Maximum Diversification Value Growth Total Market Share by Advanced Beta Strategies Advanced Beta Market Share by Assets Advanced Beta Market Share by Fund Number Enhanced Futures Strategy 1.8 bn Maximum Diversifcation 2.6 bn Value 1.2 bn Growth 0.1 bn Value 10 Maximum Diversifcation 13 Enhanced Futures Strategy 43 Growth 8 Low Volatility/ Equal Weight 106 Fundamental Weight 18.1 bn Low Volatility / Equal Weight 26.2 bn Dividend 68 Fundamental Weight 97 Dividend 22.7 bn Source: Morningstar, as of 31/12/14 Source: Morningstar, as of 31/12/14 8

9 Advanced Beta Fund Asset Growth 2004 bn Growth Value Maximum Diversification Enhanced Futures Strategy Fundamental Weight Dividend Low Volatility / Equal Weight No. of Funds Source: Morningstar. Data as of 31/12/ Growth in AUM AUM growth in these strategies shows a strong upward trend suggesting that far from being a passing fad, Advanced Beta strategies are a strong global trend that is here to stay. Recent Growth in Advanced Beta AUM 2012 bn Growth Value Maximum Diversification Enhanced Futures Strategy Fundamental Weight Dividend Low Volatility / Equal Weight Snapshot: The Advanced Beta Marketplace 9

10 Deep Dive on Equity With investors attention clearly heavily focused on the sector, we take a closer look at the Equity category, the largest constituent of Advanced Beta by assets and number of funds. Equity Assets by Advanced Beta Strategy Equity Fund Numbers by Advanced Beta Strategy Value 1.2 bn Maximum Diversifcation 2.6 bn Fundamental Weight 11.8 bn Enhanced Futures Strategy 0.5 bn Growth 0.1 bn Low Volatility/ Equal Weight 22.9 bn Value 10 Maximum Diversifcation 13 Fundamental Weight 61 Growth 8 Enhanced Futures Strategy 3 Low Volatility/ Equal Weight 83 Dividend 22.7 bn Dividend 68 Source: Morningstar, as of 31/12/14 Source: Morningstar, as of 31/12/14 Global Broad Category: Equity Asset and Fund Numbers by Advanced Beta Strategy Assets in Bn Market share % Rank by Assets Number of funds Market share % Rank by Funds Low Volatility / Equal Weight Dividend Fundamental Weight Maximum Diversification Value Growth Enhanced Futures Strategy Total Source: Morningstar, as of 31/12/14 Number of Funds at End of Assets at End of Market Share at End of bn 85% A market driven by Equity 10

11 Conclusion Advanced Beta investing may still be considered by some to be at the pioneer stage but over recent years Advanced Beta funds have grown impressively in Europe, both in number and by assets gathered. Given current market sentiment and their recent performance, we expect that Advanced Beta funds will continue to proliferate. Demand for these funds has increased over the last couple of years and looks likely to continue to increase. Equity funds will continue to dominate the landscape but increasingly fixed income products are coming on stream. Expect also, in 2015 to see an increasing presence from new hybrids such as multifactor funds that combine factors such as low volatility, quality and value into one potent, effective package. Advanced Beta has come a long way, in a very short time but it s just the beginning of an exciting period of development for these funds. 11

12 Australia T: Belgium T: Canada T: Dubai T: France T: Germany T: Hong Kong T: Ireland T: Italy T: Japan T: Netherlands T: Singapore T: Switzerland T: United Kingdom T: United States T: State Street Global Advisors EMEA Entities Belgium: State Street Global Advisors Belgium: Office Park Nysdam, 92 Avenue Reine Astrid, B-1310 La Hulpe, Belgium. Telephone: , Facsimile: SSgA Belgium is a branch office of State Street Global Advisors Limited. State Street Global Advisors Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Dubai: State Street Bank and Trust Company (Representative Office), Boulevard Plaza 1, 17th Floor, Office 1703 Near Dubai Mall & Burj Khalifa, P.O Box 26838, Dubai, United Arab Emirates. Telephone: 971 (0) , Facsimile: 971 (0) France: State Street Global Advisors France. Authorised and regulated by the Autorité des Marchés Financiers. Registered with the Register of Commerce and Companies of Nanterre under the number Registered office: Immeuble Défense Plaza, rue Delarivière-Lefoullon, Paris La Défense Cedex, France. Telephone: (+33) , Facsimile: (+33) Germany: State Street Global Advisors GmbH, Brienner Strasse 59, D Munich. Telephone +49 (0) , Facsimile: +49 (0) Netherlands: State Street Global Advisors Netherlands, Adam Smith Building, Thomas Malthusstraat 1-3, 1066 JR Amsterdam, Netherlands. Telephone: SSgA Netherlands is a branch office of State Street Global Advisors Limited. State Street Global Advisors Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom. United Kingdom: State Street Global Advisors Limited. Authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No VAT No Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. Telephone: , Facsimile: The views expressed in this material are the views of the Global Equity Beta Solutions group through the period ended 31 October and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Past performance is not a guarantee of future results. Asset Allocation is a method of diversification which positions assets among major investment categories. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Currency Risk is a form of risk that arises from the change in price of one currency against another. 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