Invesco Factor Investing Study 2021

This is the third year this study has examined the intersection of ESG and factor investing. Over those three years, we have recorded a rapid increase in appetite for incorporating ESG via factor methodologies, as well as an increased recognition of the benefits of this approach. The trend continued in 2021, and as it takes hold, so too has recognition of the challenges to be navigated, including a limited supply of ESG factor products and uncertainty about the impact of ESG on factor exposure targets.

In last year’s report, we found an almost universal belief that factor investing can be extended to fixed income. One year further on, significantly higher adoption has followed – 55% of investors are now using factors in fixed income, up from 40% in last year’s study. For the majority (52%), factor investing in fixed income includes the use of both investment factors (such as value/quality) and macro factors (such as duration/inflation). However, 23% are only using investment factors and a quarter look at factors solely through a macro lens.

Since this report’s inception, we have seen a rapid advance in the sophistication of factor users. This has included rising use of multi-factor strategies. Investors have sought exposure to a greater range of factors over the past three years, with value, quality, and low volatility now the most prevalent. The rapid uptake of multi-factor approaches has also seen factor investing become more dynamic.

The economic fallout from the COVID-19 pandemic has presented a range of challenges to investors, including high levels of volatility and record low yields. These challenges have also provided a test for factor approaches, with the ability to better control sources of risk and the possibility of increased returns being key drivers of adoption. On both of these criteria, the majority of investors say their expectations have been either met or exceeded, and indeed 40% of respondents say the pandemic has increased the appeal of a factor approach, while only 19% say the opposite.