Using factors for potential return enhancement
Investors are increasingly looking to factor investing as a valuable tool to help achieve investment objectives.
Today, possibly half of institutional investors use factor strategies for at least some portion of their portfolios. And when over 300 global institutional and wholesale investors who are already using factors were asked why they did so in a 2018 Invesco survey, the majority named risk-adjusted returns as their most important measure of success.1
Given expectations of a lower-return environment in the future, the desire to enhance returns is sensible. But, most investors are not experienced with factor investing nor do they fully understand the practical challenges of applying the theory to practice.
In the second paper of this series, we addressed how investors can start by looking at their existing portfolios in factor terms and understanding where they are over- and under-weighted. In this latest paper we discuss how they can then deliberately position their portfolios across factors in an attempt to enhance performance.
We explore:
- What factors are
- How they work
- How they may be successfully positioning factors in portfolios to pursue specific return profiles
Also in the Invesco Investment Solutions focus paper series:
Footnotes
- 1 Invesco Global Factor Investing Study 2018, page 21.
Investment risks
- The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Factor investing (as known as smart beta or active quant) is an investment strategy in which securities are chosen based on certain characteristics and attributes that may explain differences in returns. Factor investing represents an alternative and selection index based methodology that seeks to outperform a benchmark or reduce portfolio risk, both in active or passive vehicles. There can be no assurance that performance will be enhanced or risk will be reduced for strategies that seek to provide exposure to certain factors. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. Factor investing may underperform cap-weighted benchmarks and increase portfolio risk. There is no assurance that the factors discussed will achieve their investment objectives.
Important information
- Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
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