Investors Sweet on ETFs, Smart Beta Indexes

Institutional appetite for exchange-traded funds (ETFs) and smart beta indexes is soaring, according to EDHEC-Risk Institute and Amundi’s latest survey.

Six out of seven asset classes posted a gain in ETF market shares, the joint European survey found. The increase was slight for equities, government bonds, and infrastructure, while corporate bonds, real estate saw double-digit jumps.

This uptick in ETF use tracked investors’ satisfaction with the vehicles, the survey found. Investors were most pleased with ETFs based on highly liquid asset classes, with equity ETFs enjoying a satisfaction rate of 98% in 2015.

Respondents were also optimistic about their future use of ETFs.

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The percentage of investors planning to increase ETF allocations remained steady at around 60% since 2011, while more than a third said they would maintain their current level in 2015.

Concern for cost was the main driver of this appetite (80%), followed by performance (50%), transparency (46%), and liquidity (45%).

Investors were likewise bright about the use of smart beta ETF products. In 2015, 68% of respondents used ETFs to invest in smart beta, a significant increase from 49% in 2014. Smart beta ETFs also received an 86% satisfaction rate in 2015, compared to 74% in 2014.

Furthermore, three-quarters of respondents believed smart beta indexes provided “significant potential to outperform cap-weighted indexes in the long term,” the survey found.

However, investors argued there is room for further product development, especially since product launches have focused on only a few popular strategies such as value premium and defensive equity.

Some 94% also agreed that smart beta indices require full transparency on methodology and risk analytics.

“Transparency is not only the best protection against the risks arising from conflicts of interests, but it is also instrumental in improving the informational efficiency of the indexing industry,” EDHEC and Amundi concluded. The two firms have partnered on creating and selling factor-tilted ETFs.

EDHEC-Risk_Amundi Source: EDHEC-Risk Institute & Amundi

Understaffing, inadequate technology, and risk management issues are among the problems being tackled by New York City’s Bureau of Asset Management.

When Scott Evans first arrived at New York City’s Bureau of Asset Management, half of the leadership positions were missing, the staff that did exist was “egregiously undercompensated,” and the office itself was “embarrassingly abominable,” with working conditions no better than those found in a college dorm.

As the CIO summed it up at the common investment meeting for the city’s five pension funds on Wednesday: “We need to show our employees respect.”

“If you don’t have good people, you can’t succeed,” Evans said. “I want every employee to feel we are going to make a long-term investment in them.”

“If you don’t have good people, you can’t succeed. I want every employee to feel we are going to make a long-term investment in them.”This focus on talent development and recruitment comes after a 398-page review of the bureau’s operations highlighted understaffing as an area in need of “critical” attention.

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The report, conducted by Funston Advisory Services, consisted of 240 recommendations to improve the Bureau of Asset Management, which oversees investments of New York City’s $160 billion pension funds. Other areas rated as “critical” by the consultant included risk management and information systems.

Already, Miles Draycott has been brought on as the bureau’s first chief risk officer to tackle operational risks, while new Strategic Initiatives Director Cara Schnaper is focusing on areas including technological needs and reporting processes.

“Right now, our fund accounting processes are clunky to say the least,” Schnaper said during a presentation of the bureau’s roadmap for reforms. “If we don’t get out of all the noise we’ll never be able to look at what’s really on the table.”

Evans estimated that the technology alone needed to improve the bureau’s operations and reporting will cost more than $2 million—more than quadruple the $463,845 grant currently awarded to the bureau for non-personnel expenses.

“We were built to support a stocks and bonds portfolio,” Evans said. “You can’t manage a modern portfolio with an infrastructure that is not robust and that is not suited for the task.”

As for personnel expenses, Evans is requesting an additional $1.3 million to bring the total staff count up to 71. Currently, the bureau employs 48 staffers, with the authorization to hire 13 more.

The CIO is also seeking funding for training programs for bureau employees.

“We want to develop our people,” he said. “Right now we’re not spending any money on training.”

Given that the 240 recommendations made by Funston encompass more work than can likely be completed before Comptroller Scott Stringer’s term ends December 2017, Evans said the goal is to tackle the most severe issues now while creating a foundation for lasting change.

“It is important to us that we’re building an organization that will be here even when those of us with the Stringer administration are gone,” Evans said. “We think we’re making great strides.”