Factor investing: Harnessing the building blocks of investments

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.

Factors exist across asset classes. A factor-based 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.

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.
size
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 equity Factors, launch our Factor eXposure Tool >

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

To learn more about fixed income factors, visit our fixed income factor strategy page >

Over several decades, factor investing has evolved from an academic concept to a strategic initiative.
Bernhard Langer

Duy Nguyen discusses why he believes factor-based investing is key to succeeding in the current market environment.

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

Introducing our 2019 Global Factor Investing Study

We're pleased to unveil the fourth edition of the Invesco Global Factor Investing Study. Based on interviews with more than 240 institutional and wholesale investors around the world, managing over $25T in assets, this report is one of the largest in-depth analysis of global factor investing being undertaken at the current time.

This year’s study is an opportunity to understand paths of adoption, experiences, methods of implementation, future intentions and challenges to be overcome in factor investing. Key themes include:

Key themes

Factor investing adoption continues at pace as asset owners pursue a long-term approach.
Investors embrace active implementation as they move to dynamic approaches.
Factor investing and Environmental, Social and Governance (ESG): parallel developments, uncertain linkages.
Future of factors: overcoming the barriers to scaling up.
Fixed income: the next frontier for factor investing.

Get the Global Factor Investing Study Summary
The largest and most in-depth examination of global factor investing.

Download

To receive a copy of the full report, please contact your Invesco representative.

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 'Why should investors consider credit factors in fixed income?'

Why should investors consider credit factors in fixed income?
by Jay Raol, Ph.D., Director of Invesco Fixed Income Quantitative Research and Shawn Pope, Macro Quantitative Analyst, Invesco Fixed Income.

Download white paper  
Cover to 'Why should investors consider credit factors in fixed income?'

Why should investors consider credit factors in fixed income?
by Jay Raol, Ph.D., Director of Invesco Fixed Income Quantitative Research and Shawn Pope, Macro Quantitative Analyst, Invesco Fixed Income.

Download white paper  

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.

  • Invesco Exchange-Traded Funds is a smart beta 1 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.
Cover to 'Why should investors consider credit factors in fixed income?'

Why should investors consider credit factors in fixed income?
by Jay Raol, Ph.D., Director of Invesco Fixed Income Quantitative Research and Shawn Pope, Macro Quantitative Analyst, Invesco Fixed Income.

Download white paper  

1 Smart beta is a rules-based investment process that seeks to reduce portfolio risk, outperform a benchmark, or both. Smart beta investing may increase portfolio risk or underperform a benchmark.