Factor investors increase allocations to weather market volatility and integrate ESG

  • 67% of respondents agree that factor investing helped them manage market volatility over the past year, and 64% said their faith in factors grew over the previous 12 months.
  • 41% of respondents increased allocations over the past year and 39% plan to increase in the next year. 
  • Investors are more comfortable updating factor strategies with greater frequency; 43% change factor definitions every 1-3 years, up from 16% in 2021.
  • 66% of investors now believe factors can be used to implement ESG objectives.

Hong Kong, 26 September 2022 – Invesco today released the findings of its seventh annual Invesco Global Factor Investing Study. The Study is based on interviews with 151 institutional and retail factor practitioners managing over US$25.4 trillion in assets combined.

This year’s study found respondents expect factor-based strategies to outperform in an inflationary environment with slow economic growth. Respondents also believe the current market environment makes factor investing in fixed income more attractive as a better way to manage volatility and diversify portfolios.

Market turmoil highlights value of factors in managing risk

Persistent inflation and rising interest rates over the past 12 months have dramatically impacted the investment environment, compelling respondents to re-evaluate their portfolios including factor exposures. Despite these challenges, respondents still generally believe that factors are well-suited to managing risk during market turbulence, with 67% agreeing that factor investing helped them manage market volatility over the past year. A similar number, 64%, indicated their faith in factors grew over the previous 12 months.

Meanwhile, factor allocations continue to rise, with 41% of respondents increasing allocations over the past year and 39% planning an increase in the next year.  Only 1% of respondents decreased allocations to factor over the past year.  Respondents expect value, low volatility, and quality to be the best performing factors over the next 12 months. A majority (over 80%) believe their factor allocations have met or exceeded the performance of their fundamental active strategies, while 64% indicated their factor allocations met or exceeded performance versus market-weighted strategies.

Stephen Quance, Global Director, Factor Investing at Invesco, commented, “The fact that investors actually increased their support and exposure to factor strategies through this latest global bear market cycle speaks to how comfortable and confident they have become with a factor approach as a pillar of investing alongside active and passive.  This is a trend we have seen across geographies including Asia Pacific where factors can systematically target specific outcomes in a risk-off, rising rate environment.” 

Meanwhile, the frequency at which respondents review and change their factor definitions is evolving.  41% stated they rarely (every 3-5 years) change their factor definitions, which is down from 66% in 2021. Currently, 43% of respondents are changing their factor definitions frequently (every 1-3 years), up from 16% in 2021.

Respondents looking to fixed income factors for new sources of return

This year’s research indicated an increased demand for fixed income factors as bond markets ended a multi-decade bull run. Over 50% of respondents believe the current market environment makes factor investing in fixed income more attractive. Fixed income factors also continued their steady increase in acceptance this year, with 92% of respondents believing factor-investing can be successfully applied in fixed income, a significant increase from 61% in 2016.

Investors generally see fixed income returns as closely tied to fundamental macroeconomic variables. Respondents applying a systematic approach to their fixed income portfolios often initially prioritize traditional macro drivers of return, such as inflation and interest rates, before later incorporating investment factors such as value. This year 54% of respondents said they use both macro and investment factors, and only 14% target investment factors in isolation.

Within fixed income asset classes, respondents are using factor investing the most in government bonds (76%) and corporate bonds (75%), reflecting both the depth and liquidity of these markets as well as the number of products available. Respondents anticipate that factor investing will spread further in fixed income, with a clear majority (71%) believing they will use high yield bonds as part of their fixed income factor exposure in the next five years.

Stephen Quance commented: “The evolution of factor strategies in fixed income illustrates the continuing evolution of the segment overall.  Without a tailwind of falling interest rates, the importance of factor exposures may increasingly explain deviations in results.”

Increased application of factors to ESG

Respondents have shown increasing adoption of ESG in their overall portfolios, driven partially by a conviction that such adoption can enhance performance.  This conviction has come under pressure over the last year as extractive industries have broadly seen strong returns, reflected in the fall of respondents to 59% (from 75% last year) who see enhanced performance as the main reason for ESG adoption.  Notably, while enhanced performance was previously the most commonly cited reason for ESG adoption in factor investing, this year the top reason was demand from clients and beneficiaries (76% of respondents).  

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Important information

This article is for trade press for informational purposes only. Circulation, disclosure, or dissemination of all or any part of this article to any person without the consent of Invesco is prohibited.

This is Invesco’s seventh annual Global Factor Investing Study. This study incorporates the views of 151 investors including pension funds, insurers, sovereign investors, asset consultants, wealth managers and private banks, collectively responsible for managing over $25.4 trillion in assets (as of 31 March, 2022). 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.  “Factor investing” is a form of investing in which securities are chosen based on attributes (commonly termed ‘factors’) that have tended to offer favorable risk and return patterns over time.

The fieldwork for this study was conducted by NMG Consulting between April and May 2022.  Institutional investors are defined as pension funds (both defined benefit and defined contribution), sovereign wealth funds, insurers, endowments, and foundations. Retail investors are defined as discretionary managers or model portfolio constructors for pools of aggregated retail investor assets, including discretionary investment teams and fund selectors at private banks and financial advice providers, as well as discretionary fund managers serving those intermediaries.

All data are sourced from Invesco dated 30 June 2022, unless otherwise stated. This document contains general information only. It is not an invitation to subscribe for shares in a fund nor is it to be construed as an offer to buy or sell any financial instruments. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. While great care has been taken to ensure that the information contained herein is accurate, no responsibility can be accepted for any errors, mistakes or omissions or for any action taken in reliance thereon. Investment involves risks. Past performance is not indicative of future performance.

The distribution and offering of this document in certain jurisdictions may be restricted by law. Persons into whose possession this document may come are required to inform themselves about and to comply with any relevant restrictions. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorized or to any person to whom it is unlawful to make such an offer or solicitation.

Where Stephen Quance has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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