Factor investing: Harnessing the building blocks of investments

In recent years, interest in factor-based investing has increased meaningfully as investors seek precise and systematic solutions to achieve their investment objectives

Invesco has been a leader in factor investing for more than 30 years and currently manages more than $160.2 billion in assets within factor-based strategies for clients around the world.1 These strategies aim to deliver client outcomes that go beyond the limitations of traditional benchmark-centric approaches.

1 Source: Invesco, as of March 31, 2017

In recent years, interest in factor-based investing has increased meaningfully as investors seek precise and systematic solutions to achieve their investment objectives

Invesco has been a leader in factor investing for more than 30 years and currently manages more than $160.2 billion in assets within factor-based strategies for clients around the world.1 These strategies aim to deliver client outcomes that go beyond the limitations of traditional benchmark-centric approaches.

1 Source: Invesco, as of March 31, 2017

Invesco's Factor eXposure tool can help you identify the underlining factor exposure in a wide variety of investments Invesco Global Factor Investing Study Download the whitepaper (pdf)
Invesco's Factor eXposure tool can help you identify the underlining factor exposure in a wide variety of investments Invesco Global Factor Investing Study Download the whitepaper (pdf)

In recent years, interest in factor-based investing has increased meaningfully as investors seek precise and systematic solutions to achieve their investment objectives

Invesco has been a leader in factor investing for more than 30 years and currently manages more than $160.2 billion in assets within factor-based strategies for clients around the world.1 These strategies aim to deliver client outcomes that go beyond the limitations of traditional benchmark-centric approaches.

1 Source: Invesco, as of March 31, 2017

Invesco Global Factor Investing Study Download the whitepaper (pdf)
Invesco Global Factor Investing Study Download the whitepaper (pdf)

What is factor investing?

We believe factor investing has the potential to drive more precise investment and asset allocation decisions in an attempt to optimize a truly diversified portfolio targeting a specific risk/return objective.

Unlike traditional stock picking, this investment approach seeks exposure to particular factors rather than focusing on sectors, geographies or investment styles. This is important to defined contribution plan sponsors because the low-yield environment coupled with a longer living population makes planning for retirement even more challenging.

Factors can be viewed as the DNA, or building blocks, of an investment portfolio. Historically, they have carried certain traits and behaviors. When combined, factors can act as the building blocks of a diversified portfolio.
Dan Draper
Over several decades, factor investing has evolved from an academic concept to a strategic initiative.
Bernhard Langer
Examines a stock's earnings, book value and sales relative to its price. The higher these fundamental ratios are, the cheaper the stock.
value
Value
Ranks stocks by their market cap, with smaller companies ranking higher.
small size
Small Size
Considers the magnitude of up and down price of a stock's trailing 12-month price returns.
low volatility
Low Volatility
Stocks that have had high risk-adjusted 12 month returns excluding the most recent month.
momentum
Momentum
Companies with fundamental ratios that point toward a strong balance sheet and stable earnings growth.
quality
Quality
Ranks stocks based on their annualized dividend yield.
dividend
Dividend Yield

To learn more about Factors, launch our Factor eXposure Tool >

To learn more about Factors, launch our Factor eXposure Tool >

Factors can be viewed as the DNA, or building blocks, of an investment portfolio. Historically, they have carried certain traits and behaviors. When combined, factors can act as the building blocks of a diversified portfolio.
Dan Draper
Over several decades, factor investing has evolved from an academic concept to a strategic initiative.
Bernhard Langer

Why factor investing?

There is evidence to suggest that factor investing not only has the potential to outperform market-cap-weighted benchmarks in the long run, but also with a greater risk-adjusted trade-off.Factor investing may be a plausible solution for participants and retirees who don’t want to incur additional volatility, but at the same time are looking for growth to make sure they don’t outlive their retirement money.

This potential outperformance is driven by the fact that markets are inefficient while investors are not rational by nature. Factor investing seeks to exploit these market inefficiencies and behavioral biases to harness factor premiums.

risk premiums
Risk premiums
For bearing additional risk over the broad equity market e.g. an undesirable return patterns.
behavioral rationals
Behavioral rationales
Markets are inefficient due to behavioral biases of participants.
market structure
Market structure
Markets may be inefficient because of restrictions and limitations.

Why now?

Past bouts of market volatility resulted in unexpected portfolio drawdowns for many investors who were diversified by asset class — leaving them with questions about how to truly reap the benefits of diversification. At the same time, investors’ return and cost expectations are becoming more conservative, with the focus shifting toward better risk-adjusted returns.

With investors now looking more closely at risk, we believe factor analysis can be a particularly useful tool for portfolio construction. Plan sponsors should consider incorporating factors into their target date funds to mitigate volatility as participants approach and navigate through retirement.

seven factors of risk: market uncertainty, realization of the correlation between asset classes, sharp portfolio draw downs, high volatility, cost awareness, low interest rates, and regulation seven factors of risk: market uncertainty, realization of the correlation between asset classes, sharp portfolio draw downs, high volatility, cost awareness, low interest rates, and regulation

Invesco Global Factor Investing Study

Our factor investing study explores the growth of factor investing via in-depth face-to-face interviews with chief investment officers, strategy unit executives and factor specialists at 66 leading global institutional investors, asset consultants and private banks. We spoke with investors that were leading the way when it came to factor investing as well as ‘non-users’ who have to adopt this investment approach.

Key themes

key themes table key themes table

Download the Invesco Global Factor Investing Study >  
Download the Invesco Global Factor Investing Study >  
Download the Invesco Global Factor Investing Study >

Investment capabilities

Invesco is an expert practitioner in factor science and continues to innovate in the area of portfolio construction. Read more about using factor science in portfolio construction.

Cover to 'Factor investing: An introduction'

Factor investing: An introduction
by Raol, Stoneberg and Waisburd

Download introduction 
Cover to 'Factor investing: Building balanced factor portfolios'

Factor investing: Building
balanced factor portfolios
by Leung and Waisburd

Download guide 

Contact us at USinstitutional@invesco.com

Investment capabilities

Invesco is an expert practitioner in factor science and continues to innovate in the area of portfolio construction.

  • PowerShares by Invesco is a smart beta1 pioneer, offering a wide variety of single-factor and multi-factor exchange-traded funds focused on low volatility, momentum, quality, value, size and dividend yield.
  • The Invesco Quantitative Strategies team takes an active approach to building factor portfolios, incorporating sophisticated, scientific skills in risk premiums, strategic and tactical factor allocation including dynamic allocation of investment themes.
  • 1 Smart beta is a rules-based investment process that seeks to reduce portfolio risk, outperform a benchmark, or both.

PowerShares*

US $ 120B+
in assets under management
11
Investment professionals
Since 2003
Factor-based smart beta pioneer
4th
Largest ETF provider with over 130+ ETFs

*Source: Invesco as of March 31, 2017

PowerShares*

US $ 120B+
in assets under management
11
Investment professionals
Since 2003
Factor-based smart beta pioneer
4th
Largest ETF provider with over 130+ ETFs

*Source: Invesco as of March 31, 2017