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Factor Investing
Invesco Global Systematic Investing Study 2023
By focusing on the future landscape, this research offers timely perspectives on how investors are deploying (and looking to deploy) advanced methodologies to construct resilient portfolios and potentially generate alpha.
About the study
Welcome to Invesco’s Global Systematic Investing Study 2023. This year, the title of the annual factor investing study has been refreshed to the Global Systematic Investing Study. This change reflects the progression of quantitative investing over the past several years. Since its inception in 2016, the report has provided insights into factor investing. Going forward, the report takes a broader view encompassing the full and rapidly advancing systematic investing space.
Transcript: Show transcript
Welcome to the eighth iteration of the Invesco Global Factor Investing study, which has now been rebranded as the Invesco Systematic Investing Study. This year, the study has expanded to look at the broader use of systematic approaches in investing both across and within asset classes. Themes in 2023 include ways investors are responding to macroeconomic uncertainty, the evolution of portfolio construction techniques and new tools and emerging technologies such as AI. Finally, the use of systematic methods in sustainable investing is our fourth theme.
The first theme of the study looks at how systematic and factor based approaches can help investors navigate an uncertain macroeconomic environment. Investors note that systematic strategies are increasingly more attractive given the current higher interest rate environment, and overall, investors indicate they plan to increase adoption, which is consistent with the trend we observed over the last eight years.
In the second theme, we explore investor preferences for more dynamic approaches to managing portfolios and controlling risks. This year's survey found that 75% of all investors adjust factor exposures through time to respond to changes in economic conditions and to balance exposures at the overall portfolio level. Understandably, this has been influenced by more rapidly changing market landscape. We have observed over the last few years.
The third theme focuses on the rise of artificial intelligence and its use in systematic investing strategies.
Importantly, we find that more than half of respondents are already using artificial intelligence in some form, along with the growth in AI. The importance of data, both proprietary and public, is highlighted. Given the access and cost to such data continues to improve.
in the fourth theme. We explore the use of systematic approaches in sustainable investing.
This year, study found over 80% of respondents currently incorporate environmental, social and governance considerations to some degree in their current investment process. Respondents found that systematic tools help to target specific themes and provide better control of performance and risk considerations.
Thank you for your interest in this year's report. We hope you enjoy these valuable insights and look forward to engaging further as we explore the evolution of systematic investing worldwide.
Systematic investing: The future landscape
Based on interviews with 130 systematic investors — defined as investors that employ structured, rules-based quantitative models and algorithms to make investment decisions — this research collects the opinions of senior decision-makers responsible for managing $22.5 trillion in assets (as of March 31, 2023).
Time to watch: 2:23
Key themes
The research identified four main themes, which the study explored further. These include using systematic strategies to adjust to changing macro environments, utilizing artificial intelligence (AI) in the investment process, building more flexible systematic strategies, and incorporating systematic strategies in sustainable investing.
Invesco Global Systematic Investing Study 2023
By focusing on the future landscape, this research offers timely perspectives on how investors are deploying (and looking to deploy) advanced methodologies to construct resilient portfolios and potentially generate alpha.
Multi-factor strategies
Harness the power of diversified factor strategies for better portfolio resilience through any market conditions
Investment risks & important information
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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 investment strategies discussed in this material will achieve their investment objectives.
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A systematic surge: Investors reach for a diverse toolbox in a changing macro environment
While factor investing has historically been the cornerstone of systematic strategies, investors today are broadening their toolkits and using more diverse strategies (figure 1). As one North American wholesale investor noted: “Traditionally, factor investing has been based around overweighting specific factors, such as value and momentum, to capture risk premia. Systematic investing now encompasses a broader range of quantitative methodologies.”
Figure 1. Systematic methodologies/tools used in portfolio construction, % citations
Which of the following systematic methodologies/tools are you using in your portfolio construction? Sample size: 130. Grouped by Region Total/APAC/EMEA/North America showing the responses for the tools and methodologies used by respondents. Factor based investing: 94/93/94/94, Dynamic asset allocation: 78/77/73/82, Multi-asset analytics: 51/50/35/67, Systematic risk mitigation using derivatives/options: 51/60/41/55, Quantitative ESG models: 43/63/35/39, Machine learning/AI: 30/50/12/35.
The evolution of systematic portfolio construction
The second theme explores the evolving dynamics of systematic investing. This study has highlighted the trend towards a more dynamic approach to adjusting factor exposure over the past several years. We find that nearly three-quarters of respondents adjust through time (figure 2), utilizing a broad range of tools to target specific factors at any point. Additionally, this year’s study has found nearly 80% of respondents view ‘growth’ as an additional factor.
Figure 2. Adjust factor weights through time, % citations
Do you adjust your factor weights through time? Sample size: 130. Chart shows by region responses to whether respondents adjust factor weights through time no/yes. Total: 25/75, APAC: 27/73, EMEA: 14/86, North America: 33/67.
Algorithms and alpha: Investors look to an AI-based future
Data and technology become the focus of the third theme. The rise of AI has been noticed by systematic investors, with almost 50% of respondents already implementing some form of AI (figure 3). Adoption is expected to continue and expand across systematic investing practitioners.
Figure 3. Use of AI in investment process, % citations
Do you incorporate AI into your investment process? Sample size: 130. Divided by Retail and Wholesale respondents, chart shows the responses split for Use of AI in the investment process for AI used extensively/AI used to a limited extent/Do not use AI but considering/Do not use AI and not considering. Institutional: 10/35/44/11, Wholesale: 8/42/40/10.
Investors look to systematic strategies to overcome ESG challenges and meet competing goals
The fourth and final theme for 2023 continues the exploration of systematic investing’s intersection with environmental, social and governance (ESG) investing. Two-thirds of respondents reported using systematic tools in their ESG investing, citing improved performance and risk management as the key drivers (figure 4). The rise of technology from the third theme continues to the fourth, with half of respondents expecting to increase their use of AI and other systematic tools to reconcile data inconsistencies and analyze large data sets more effectively.
Figure 4. Advantages of a systematic approach to ESG, % citations
What are the advantages of a systematic approach to applying ESG? Sample size: 100. Chart showing the advantages of systematic approach to ESG split by Total/APAC/EMEA/North America. Improved performance: 77/90/50/89, Improved risk management: 71/83/69/63, Enhanced portfolio diversification: 59/67/53/58, Increased efficiency/lower costs: 39/43/44/32, Improved scalability and capacity: 36/37/34/37, Identification and control of portfolio tilts/bias: 29/23/41/24.
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