Investors using factors to optimize risk, position for post-pandemic recovery; fixed income and ESG factor strategies expand
- 43% of respondents have increased allocations to factor investing over past 12 months
- Allocations to value increasing following performance streak and to capture post-pandemic recovery
- Respondents comfortable with more complex strategies including multi-factor and dynamic
- Most investors (55%) now use factors in fixed income, seeing advantages over pure passive
- Factors are useful for incorporating ESG but suitable products remain elusive
Hong Kong, 27 September 2021 – Invesco today released its sixth annual Global Factor Investing Study (link). The study is based on interviews with 241 factor investors responsible for managing over $31 trillion in assets.
This year’s study found factor allocations continuing to rise, with 43% of respondents increasing allocations over the past year and 35% planning an increase in the next year. Only 8% of respondents indicated they planned to decrease factor allocations in the next 12 months.
Increased allocations were sourced primarily from new money (38% of all respondents) followed closely by fundamental active (37%). Among Asia Pacific (APAC) respondents, fundamental active was a larger source of funding for new factor allocations at 41% versus 32% from new money.
The value factor received the greatest increase in allocations over the past 12 months at 42% of respondents, followed by quality (31%), low volatility (27%), and momentum (26%). 48% agreed that they were increasing their allocation to value in preparation for a post-pandemic recovery. Small size saw the greatest decrease in allocation, at 18%.
“Optimizing risk” is the most important reason for using factors, with 91% of respondents identifying this objective; “increase returns” follows closely with 85% of respondents. A clear majority of investors believe their objectives for factor investing have been met or exceeded, although 26% of respondents noted that their objective to “increase returns” had not been met.
Stephen Quance, Global Director, Factor Investing at Invesco, commented: It makes sense that we see APAC investors drawing down more from active strategies to fund factor allocations, given there is less existing allocation to pure beta market-weighted strategies when compared to their Western peers. Overall, investors continue to take a constructive view on factor strategies as a key tool to help them meet their investment objectives.”
Most investors now use factors in fixed income, seeing advantages over pure passive
Use of factors in fixed income climbed substantially to 55% of respondents in this year’s study, versus 40% last year. More than half of respondents (52%) use both investment factors (such as value/quality) and macro factors (such as duration/inflation) in their factor strategies.
Nearly half (45%) of investors indicated that the current low-yield macro environment has made the use of factors within fixed income portfolios more attractive. Control over sources of risk (51%) and diversification (49%) were cited as “very important” reasons for choosing a factor approach over a passive approach. Respondents saw factor strategies as generally on par with active management in exploiting sources of alpha including risk premiums, behavioural rationales and market structures, although active is still seen as having some advantage over risk management.
Investors most commonly cite limited availability of product as a challenge for factor investing for fixed income (56% of respondents). Relatedly, while most investors believe they have a clear view of factor exposures on their equity portfolio, only 39% agree they have a clear view of such exposures for fixed income portfolios.
Investors move to dynamic strategies, adjust factors with macro environment
Investors have become comfortable with more complex factor strategies, with 72% now using multi-factor strategies and 30% using dynamic factor strategies. The dynamic approach, which rotates allocation across different factors over time, is set to accelerate, as 29% of investors say their approach has become more dynamic over the past two years and 41% expect to be more dynamic over the next two years.
Almost half (48%) make long-term strategic adjustments to exposures based on expected performance of factors at different points in the economic cycle, but a sizeable minority (30%) makes short-run tactical adjustments to take advantage of pricing opportunities.
There is widespread belief that the applicability of factors can change due to macro/industry trends, with 82% of respondents agreeing that the applicability of factors changes over time. Investors generally believe the rise of technology (87%) and globalisation (72%) have already impacted the applicability of different factors; while only 48% of respondents said that climate change has already impacted factor applicability, 86% agreed it was likely to impact factor applicability in the future.
ESG ripe for factor models but incorporation still lags
In line with market trends, the study revealed that a high proportion of survey respondents (78%) have incorporated ESG in their overall portfolios. Enhancing investment performance is the top driver of ESG adoption this year, cited by 75% of respondents, followed closely by client/beneficiary demand at 72%.
While ESG is broadly incorporated into respondents’ overall portfolios, just under half (48%) are using factor investing to help incorporate ESG, and only 30% agree that ESG is an investment factor in its own right. Among those that do incorporate ESG into factor portfolios, 72% apply ESG screen to the investment universe prior to applying a factor model, while 57% incorporate ESG variables in the factor models.
Investors highlighted identifying ESG equivalent products as a key challenge for integration. For example, 46% of respondents agreed that they would be more likely to invest in factor ETFs that incorporate ESG than standard factor ETFs, but 49% agreed that they sometimes struggle to find the right factor ETF for their needs, and only 26% agreed that it is easy to communicate to clients/stakeholders how ESG factor ETFs operate.
Stephen Quance concluded: “We see more APAC investors are looking for options beyond active strategies covering ESG and fixed income investments. Factor strategies are relatively cost competitive, making them a good alternative to passive indices and complementary to active. There is clearly opportunity for the factor investing ecosystem to expand and introduce offerings that meet investor needs, for example through ETFs.”
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Important information
This article is for trade press for informational purposes only. Circulation, disclosure, or dissemination of all or any part of this article to any person without the consent of Invesco is prohibited.
This is Invesco’s sixth annual Global Factor Investing Study. This study incorporates the views of 130 Institutional investors and 111 wholesale investors collectively responsible for managing over $31 trillion in assets (as of 31 March, 2021). This makes it a uniquely large and comprehensive examination of global factor investing, a form of investing in which securities are chosen based on attributes (commonly termed ‘factors’) that have tended to offer favorable risk and return patterns over time. This study offers an opportunity to understand the drivers of factor investing, investor experiences, and methods of implementation.
The fieldwork for this study was conducted by NMG Consulting between April and May 2021.
All data are sourced from Invesco dated 30 June 2021, unless otherwise stated. This document contains general information only. It is not an invitation to subscribe for shares in a fund nor is it to be construed as an offer to buy or sell any financial instruments. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. While great care has been taken to ensure that the information contained herein is accurate, no responsibility can be accepted for any errors, mistakes or omissions or for any action taken in reliance thereon. Investment involves risks. Past performance is not indicative of future performance.
The distribution and offering of this document in certain jurisdictions may be restricted by law. Persons into whose possession this document may come are required to inform themselves about and to comply with any relevant restrictions. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorized or to any person to whom it is unlawful to make such an offer or solicitation.
Where Stephen Quance has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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