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Investors turn to alternative indices
01 May 2013
Northern Trust survey finds increasing interest among investors
Alternative indices are increasing being accepted into the investment mainstream, according to research by Northern Trust.
The asset manager surveyed 51 institutional investors from around the world, representing over $800bn in assets under management. It found a third of respondents already had an existing allocation to such products, while another third was considering using them. Northern Trust said of the investors using alternative indices, six in 10 had increased their allocations in the past two years.
John Krieg, Northern Trust managing director of asset management, Emea, said: “Rather than viewing their investment strategy options as either active or passive, investors today are considering a continuum of options within beta solutions, with traditional market cap-weighted indexes on one end and fully active strategies on the other.
“As institutional investors face an increasingly challenging environment, they seek increased control and flexibility in their passive mandates and this has largely contributed to the increased interest in alternative indices.”
The survey found that while investors were looking to alternative indices to access specific return factors such as value, momentum and volatility, 60% looked at the process of choosing the index as an almost active consideration. For half of the investors, the decision to allocate to alternative indexes was taken by the active team, while in 70% of cases, allocations to alternative indices were taken from previously actively-invested assets.
Northern Trust found that the primary reasons for allocating to alternative indices was to manage risk exposure (92.3%) or for diversification purposes (84.6%), with half or more of investors wanting to capture value or low volatility investments.
In terms of barriers to investing, the perceived complexity of alternative indexes and a lack of sufficient track record - as many such products are relatively new on the market - were seen as the biggest reasons.