Insight

Invesco Quantitative Strategies

Invesco Quantitative Strategies
Invesco Quantitative Strategies

Invesco Quantitative Strategies manages multi-factor low volatility equity strategies that aim to deliver superior long-term performance with a below-market level of risk. The investment process is built on the three factors: Momentum, Quality and Value. Time-proven academic research is used to determine the team’s factor definitions which are expected to deliver returns above the industry standard definitions.

Investment process

The investment process builds on three major return factors: Momentum, Quality and Value. Based on in-depth factor research, the team uses proprietary factor definitions which are expected to achieve returns over and above the industry standard factor definitions.

What do the proprietary definitions include?

The definitions include the application of Price to Cashflow measures within Value, sophisticated measures of Price Momentum and Earnings Momentum as well as Quality components, such as a fundamental health score (balance sheet strength) or net asset growth (where very high asset growth usually suggests poorer future performance).

These IQS factor definitions are based on widely respected academic research. Improving definitions, as well as utilising alternative data sources, is at the heart of our research process. For an overview of the factors applied in our process, please see figure 1 below.

As markets constantly evolve, the team continuously challenges the investment process. The model evolution is handled with particular care and changes are only implemented if in-depth research proves that changes would enhance the process. Recent enhancements include a linguistic sentiment indicator that complements our Earnings Momentum factors.

Figure 1: Factor model: our expected sources of reward – a thoughtful combination of proprietary signals
Figure 1: Factor model: our expected sources of reward – a thoughtful combination of proprietary signals
Source: Invesco. As of 30 June 2020. For illustrative purposes only. Not all signals are used in all regions and sub-models. Signals often have subcomponents. Additional signals are used in specific sub-models and definitions may vary across regions.

What are the steps taken in the investment process?

For all stocks in the European investable universe (close to 1,000 companies), the team calculates daily factor scores. These scores are then compared with the average factor exposure of all other companies in the same peer group, (i.e. the same industry and region). In a final step, all  factor scores are aggregated to a multi-factor attractiveness score for each stock. The higher the score, the more the stock reflects the intended characteristics that are driving the return.

At the same time, a proprietary risk model determines a corresponding risk forecast for each stock in the universe using the same multi-factor building blocks. The risk assessment also includes a measure of a stock’s volatility as well as correlation effects.

Through a portfolio optimisation process, the combination of stocks that maximises the exposure to the intended return factors for a target level of portfolio volatility is determined. Liquidity characteristics and diversification parameters are embedded in the optimisation process with the  target volatility typically being halfway between market risk and the lowest risk achievable from a fully invested portfolio (i.e. the minimum variance portfolio).

How is our multi-factor low volatility strategy achieved?

Using this benchmark agnostic optimisation approach, the portfolio achieves exposures to two additional intended factor characteristics that can improve the risk-adjusted performance over the cycle, Low Volatility and Size. Research (Haugen and Heins1) has shown that higher risk does not necessarily translate into higher returns and low volatility shares have outperformed those with high volatility over the long-term on a risk-adjusted basis.

This has led us to believe that a strategy focused on achieving market returns while taking on risk below the market risk level is an attractive option for investors. This is one of the two objectives that our multi-factor low volatility strategy aims to achieve:

  1. Above market returns from exposures to the Quality, Value and Momentum factors
  2. Achieving returns with a lower risk level than the market through using a low volatility strategy

To achieve these two objectives, the portfolio only allocates to stocks with our intended factor exposures. While traditional indices may apply a market cap weighting scheme, this strategy‘s weights are derived from the stocks’ factor exposures. This leads to a “Size effect” (i.e. a smaller average market cap than the index).

The resulting portfolio typically holds a diversified mix of 100+ stocks and has diversified factor exposures aimed at capturing the long-term premia of the factors Momentum, Quality, Value, Size and Low Volatility. Its active share against the MSCI Europe Index is expected to be in the range of 75-80%.

The process is generally very flexible and can adjust to individual clients’ needs. Over recent years, ESG guidelines have become more important among our clients and can be implemented in segregated accounts. Needless to say, ESG aspects are an integral part of the investment process, considered within Quality as well as in the risk management process.

Footnotes

  • 1 Haugen, Robert A. and Heins, A. James, On the Evidence Supporting the Existence of Risk Premiums in the Capital Market (December 1, 1972). Available at SSRN: https://ssrn.com/abstract=1783797 or http://dx.doi.org/10.2139/ssrn.1783797

Investment risks

  • 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.

Important information

  • Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.

    This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.