Investors retain faith in value, see opportunities to deploy factors in fixed income and ESG investing, reveals Invesco Global Factor Investing Study

• Nearly all respondents plan to maintain or increase allocations, while 44% in Asia Pacific (APAC) plan to increase and over half plan to maintain the same allocation. 
• Investors remain confident in value as a factor despite run of challenging performance, as 76% of APAC respondents still believe in value’s long-term efficacy.
• Two fifths (40%) of respondents now use factors in fixed income, and almost all say factor investing can be applied to fixed income. 
• Most institutional investors now make use of ETFs for factor investing, with ETFs accounting for an average of 14% of factor portfolios. 
• More APAC investors have an ESG policy in place than North American investors but lag Europe.  

Hong Kong, Melbourne, Mumbai, Singapore, Tokyo, 19 October 2020: The fifth Invesco Global Factor Investing Study found that 97% of factor investors were planning to either maintain or increase their factor allocations over the next 12 months, with 44% of Asia Pacific (APAC) respondents planning an increase in allocations over the next 12 months. Just over half of APAC respondents (54%) were expecting to maintain their existing allocations. 

The study, the largest of its kind, interviewed 138 institutional and 100 wholesale factor investors, responsible for managing over US$25 trillion. Interviews were conducted via video and phone in April and May of 2020.

In global equity markets, momentum, quality, and low volatility factors generally outperformed the market over the survey period. In contrast, value and small-size factors underperformed. Indebtedness and liquidity concerns weighed particularly on the small size and value factors.

This year, 65% of institutional and 67% of wholesale investors reported that their factor allocations met or exceeded their overall performance expectations in the 12 months leading up to the study. 

Despite a run of challenging performance, this edition of the study found that most investors remained committed to the value factor, believing its run of underperformance as a temporary phenomenon: 68% of APAC investors continued to believe that value would perform over the longer term and 76% said that they still believed in the long-term efficacy of value, more than EMEA investors at 63% but notably behind North American investors at 87%.  

Stephen Quance, Global Director, Factor Investing at Invesco, said: “While the classic value factor continues to face headwinds in the current global market climate, the wide variety of factor strategies which range in complexity have proven to be effective at delivering risk-adjusted performance through cycles including the current COVID-19 pandemic.  Investors continue to take a rigorous and disciplined approach to reviewing their factor strategies which remain a key component of their overall portfolio construction.” 

Investors increasingly look to fixed income factors in their portfolios
Record numbers of institutional and wholesale investors are now using factor strategies within their fixed income allocation, as 40% of respondents now said they now use factors in fixed income and more than a third are actively considering doing so. Just 17% of institutional investors said they were not considering implementation.

The 2020 study found the belief that factor investing can be applied to fixed income is now close to universal, having increased from 59% in 2018 to 95% this year. According to the research, investors believe fixed income is a good fit for a factor-based approach, with 63% agreeing that factors in fixed income are equally as important as in equities. 

APAC investors were most likely to be applying factors in government bonds (71%) than in investment grade corporates (63%) or high yield (54%).  With systematic factor strategies requiring minimum levels of trading to be viable, the levels of liquidity in certain APAC markets were continuing to act as a challenge for factor applications in certain segments.

Stephen Quance commented: “It is remarkable to see global investors begin to see factor strategies as applicable to fixed income investing just as Asia Pacific bond markets are opening further, particularly onshore China which is already the world’s second largest fixed income market.  The internationalization of this market will drive greater liquidity and serve as a catalyst for managers to create more fixed income factor strategies to meet the needs of the region’s investors.” 

Investors continue to switch to factor-based ETFs
Over the past 12 months, the use of factor ETFs has increased further among both institutional and wholesale investors: most institutional investors now make use of ETFs, accounting for an average of 14% of their factor portfolios. In the wholesale segment more than two thirds of investors make use of ETFs, accounting for half of factor portfolios overall. In total 63% of APAC factor investors were using ETFs in some form, ahead of EMEA at 45% but behind North America at 77%.

For respondents that are investing in factor strategies based around passive indexing strategies, ETFs are particularly valued for their ease of use and price. For these types of ‘enhanced’ or ‘smart beta’ applications investors reported being attracted to transparent, rules-based products that can better meet their risk-return objectives than market-weighted allocations.

ETFs are being increasingly used to implement active factor strategies. Some investors described moving towards ETFs having previously implemented factors through swaps or other derivatives executed via an investment bank. In comparison to these vehicles, ETFs were seen as preferable due to their increased transparency, with derivative-based products criticized for being opaque. For APAC investors the most important driver for using ETFs to implement factor strategies was liquidity, with 69% citing this.

Factor investing and ESG
Prior Invesco studies have noted that factor adoption has often taken place in parallel with ESG adoption.  This trend remains notable in 2020 with 84% of institutions and 71% of wholesalers (all of them factor investors) having an ESG policy in place, while more than half were already incorporating, or considering incorporating, ESG into their factor portfolio.

In APAC, 79% of investors noted having an ESG policy in place, ahead of North America at 76% but behind Europe at 82%.  For APAC investors, the decision to incorporate ESG was frequently driven by investment factors, with 79% pointing to benefits in relation to risk and 54% citing improved returns. There is also evidence of growing external pressure, with 72% citing stakeholder requirements as a motivation for incorporating ESG.  

While ESG and factor investing are generally separate phenomena, implemented independently, the two were often seen to be complementary, with 60% of APAC investors seeing ESG as aid to factor investing implementation. These benefits were generally seen as broad, with APAC investors most commonly citing superior risk management (91%) and a potential ESG-related return boost (74%).

Stephen Quance concluded: “While it may be that ESG adoption is more widespread in some other regions, Asia moves fast and interest is growing quickly. Factor investing is a natural complement as both ESG and factor investing often involve systematic use of quantitative information to build diversified portfolios.”  

Notes to Editors
The full 2020 Invesco Global Factor Investing Study for Professional Clients can be found at http://inves.co/factor_study. 

Appendix – Sample and methodology
The fieldwork for this study was conducted by NMG’s strategy consulting practice. Invesco chose to engage a specialist independent firm to ensure high quality objective results. Key components of the methodology include:
- A focus on the key decision makers conducting interviews using experienced consultants and offering market insights.
- In-depth (typically 1 hour) interviews by video and phone using a structured questionnaire to ensure quantitative as well as qualitative analytics were collected.
- Results interpreted by NMG’s strategy team with relevant consulting experience in the global asset management sector.

In 2020, the fifth year of the study, we conducted interviews with 238 different pension funds, insurers, sovereign investors, asset consultants, wealth managers and private banks globally. Together these investors are responsible for managing $25.4 trillion in assets (as of 31 March 2020).

In this year’s study, all respondents were ‘factor users’, defined as any respondent investing in a factor product across their entire portfolio and/or using factors to monitor exposures. We deliberately targeted a mix of investor profiles across multiple markets, with a preference for larger and more experienced factor users.