Mega-cap tech stock dominance prompts big shifts in systematic investing

• Tech stock outperformance has led systematic investors to recalibrate their strategies.
• Half (52%) of investors globally and 65% in APAC have increased their allocation to Value in the past year.
• Investors are adapting faster to changing market conditions – four fifths (82%) cite this as the key driver for pro-active factor allocation.
• Investors’ use of systematic strategies is increasingly sophisticated, with growing allocations to alternative asset classes such as real estate and commodities.
• APAC respondents are most likely to report using AI “extensively” in the investment process (27%).

Hong Kong, 28 October 2024 – The extraordinary performance of mega-cap tech stocks has significantly impacted factor returns, creating both opportunities and challenges for systematic investors, according to Invesco.

The findings come from Invesco’s ninth annual Invesco Global Systematic Investing Study, based on the views of 131 institutional and wholesale investors that collectively manage $22.3 trillion. It reveals a growing sophistication in investors’ use of systematic strategies as they adapt to complex and fast-changing market dynamics.

Tech stock dominance requires systematic investing rethink

Invesco found factors aligned with the success of large tech companies such as Momentum, Growth and Quality have performed exceptionally well over the past year, while Value underperformed. Now, concentration risk has driven a turnaround with more than half (52%) of investors increasing their allocations to Value in the past 12 months as they seek a potential hedge.

The trend towards Value was particularly notable among respondents from Asia Pacific (APAC), with 65% having increased exposure to that factor.  In terms of overall factor exposures among APAC respondents, there’s notably high adoption of both Value (92%) and Momentum (92%), while Low Volatility is also more prevalent in APAC than other regions (77% versus 63% globally).

“Global equity markets, driven by U.S. mega cap tech companies, have become much more concentrated over the last few years,” said Christopher Hamilton, Head of Client Solutions, Asia Pacific ex Japan at Invesco. “This is leading investors to diversify their portfolios, and many have found systematic strategies which are by nature diversified as an excellent avenue to achieve that objective, and APAC investors are soundly ahead of their global peers on this trend.”

Adaptability has enabled systematic investors to perform well in this environment. Over the past 12 months, 46% of systematic investors reported outperformance over both traditional active approaches and market-weighted strategies, contrasting with underperformance of just 8% and 6% respectively.

Need for adaptability drives increased sophistication

The need to react quickly has led to increased uptake of techniques that enable portfolios to immediately adapt to sudden changes in the macro environment. Four-fifths (80%) of respondents cited factor tilting strategies as very valuable, while 67% highlighted the importance of asset class and sector rotation models.

The key driver for pro-active factor allocation, cited by four-fifths (82%) of investors, is the desire to adapt to economic cycles. This is also reflected in the rebalancing of factors weights, with nearly all (91%) investors now adjusting their factor weights over time, an increase from three quarters (75%) in 2023.

As markets become more changeable, investors’ time horizons are also decreasing. While 40% of investors still assess performance on a standard 3–5-year time horizon, a third (32%) now use a 2-to-3-year horizon, up from less than a quarter (23%) in 2023.

The rise of alternative asset classes in systematic portfolios

Invesco found a clear trend towards more diverse systematic investor portfolios, including a significant uptick in the use of alternative asset class strategies. The study reveals 40% of investors now apply a systematic approach to real estate (vs. 31% in 2023), 36% to commodities (vs. 26% in 2023) and 34% to both private equity and infrastructure (vs. 32% and 28% in 2023 respectively).

This diversification is enabling investors to build more holistic and integrated multi-asset allocation models. However, the application of systematic strategies to less liquid assets can create challenges, particularly considering liquidity constraints rank as the first- and fourth-most important considerations for institutional and wholesale investors respectively when building multi-asset portfolios.

Systematic investors are addressing this by using tools such as liquid proxies or derivatives, which enable them to adjust overall exposure to less liquid asset classes such as real estate, whilst retaining the ability to quickly rebalance.

“Traditionally illiquid asset classes have become increasingly sizeable allocations in portfolios, so it’s logical that investors are looking at how to apply a systematic approach to these investments,” added Hamilton.  “In asset classes such as real estate, systematic strategies can be used to replicate exposure traditionally reserved for illiquid strategies.  This is beneficial for liquidity constrained investors, who can build precision solutions to replicate this exposure and quickly adapt to changing macroeconomic conditions.”  

The data revolution continues 

Underpinning the rise of increasingly diversified and sophisticated systematic portfolios is a data revolution transforming the way investors make allocation decisions. The availability of increasingly diverse data sources to inform portfolio allocations has made this possible.

While macroeconomic data (97%), fundamental company financials (81%), and technical analysis indicators (76%) are most often used, the integration of alternative data sources is also gaining momentum, with a quarter (23%) of respondents including alternative data such as satellite imagery, shipping data and weather information in their models.

APAC continues to lead in adopting artificial intelligence for use in the investment process, with respondents from the region most likely to report that AI is used “extensively” (27% versus only 9% globally).  APAC respondents were also more likely to say that AI will become more important than traditional analysis methods, at 46% versus 34% globally.  

“APAC investors have consistently show themselves to be innovative and open to new analysis methods and technologies to support their systematic investing strategies,” said Hamilton.  “Last year’s Systematic Investing Study revealed APAC respondents to be enthusiastic users of AI in the investment process and the trend shows no signs of abating this year.  Further, we see that it has now become ubiquitous for APAC to incorporate ESG into their overall portfolio.  It’s encouraging to see the rapid adoption of these analysis methods which will spur continued growth of tailored systematic solutions.”