According to a survey by US-based investment management company Invesco, a majority of global factor investors plan to maintain or increase their allocations over the next 12 months.
The Invesco Global Factor Investing Report, now in its fifth year, also found that investors in Europe, the Middle East and Africa are more likely than their counterparts in North America (31 percent) or Asia Pacific (44 percent) to make additional allocations to their factor strategies (47 percent).
Factor Investments
Factor investment is a strategy that includes targeting particular return drivers across asset classes, including valuation, momentum and dividend yields. Investing in factors will help to boost the outcomes of the portfolio, decrease volatility and increase diversification.
A wider acceptance of factors into additional asset classes, such as fixed income and exchange-traded funds, has powered the increase in factor allocations.
In the 12 months leading up to the study, which interviewed 138 institutional and 100 wholesale factor investors responsible for managing more than $25 trillion in assets, 65% of institutional and 67% of wholesale investors indicated that their factor allocations met or exceeded their overall performance goals this year.
Georg Elsaesser Senior Portfolio Manager Invesco
“Factor strategies have performed as expected and sentiment towards factor investing has remained very positive, even considering the peculiar conditions and lower returns for some factors over the past couple of years. Factor investing is here to stay and is being increasingly adopted by more investors of every size. It is important to stress that factor investors are long term, whose belief that factor premia results in excess return over the long run underpins a sense of pragmatism in the face of short-term volatility.”
Factor investments in the Middle East
In the Middle East, there has been a steady rise in the number of investors turning to factor investing.
“Investors in the region are committed to assessing risk and return of factor investing strategies over a long-term horizon, as opposed to a speculative, short-term strategy, identifying additional drivers as they gain experience,” Zainab Kufaishi, head of Middle East and Africa at Invesco, said.
According to the Invesco report conducted between April and May of this year, factors such as momentum, quality and low volatility outperformed over the survey period in global equity markets, while factors such as valuation and small size underperformed.
The Invesco survey found that indebtedness and liquidity issues weighed especially on the small size and value factors, particularly early in the interview period when many companies rushed to raise capital due to COVID-19.
Within their fixed-income allocation, record numbers of institutional and wholesale investors are now using factor strategies, the study said. 4 out of 10 respondents said they are now using fixed income variables, while over a third are seriously considering doing so. Just 17 percent of institutional investors said they were not considering using fixed-income allocation factor strategies.
“The relatively high proportion of respondents either investing in fixed income via factors, or considering their introduction, points to the appeal of more systematic approaches to the asset class,” Mr Elsaesser added.
The study found that the assumption that investment variables can be applied to fixed income is now close to universal, rising from 59 percent in 2018 to 95 percent this year.
Exchange-traded fund
Exchange-trade funds or ETFs are being used increasingly by both institutional and wholesale investors to execute active factor strategies.
An ETF is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold throughout the day on stock exchanges.
ETFs are now used by 6 out of 10 institutional investors, accounting for an average of 14 percent of their factor portfolios. More than two-thirds of investors in the wholesale segment use ETFs, accounting for half of the total factor portfolios, the research found.
The number of investors using the principles of ESG (environmental, social and corporate governance) is also gradually growing. 84 percent of institutions and 71 percent of wholesalers, all factor investors, had an ESG strategy in place this year, while more than half had either integrated ESG into their factor portfolio or were considering integrating it.
“While ESG and factor investing are becoming increasingly integrated, the concurrent adoption of both appears to be causing challenges for some investors that used to implement them independently of each other,” Mr Elsaesser said. “This is especially true as many factor products are not ESG-integrated, and most ESG products are not factor strategies.”
