North America is leading the way in the adoption of factor allocations by institutional investors, according to Invesco Ltd.’s annual global factor investing study.

Predominantly driven by public sector pension plans and insurers, institutional investors in North America have increased their allocations to factor strategies to 19 per cent this year. That compares to 16 per cent in 2016.

Read: Factor investing expected to rise over next five years: report

“It is still relatively early in the adoption process for many, but our respondents make it clear that it will become more prominent over time,” said Georg Elsaesser, senior portfolio manager of quantitative strategies at Invesco, in a press release.

Institutional investors cited risk benefits as the primary reason for larger allocations. Besides potential alpha improvements, cost remains an important driver, according to the study. It also noted the rise in factor investing reflects the need to help mitigate challenges such as pricing and exposure to geopolitical risk in the public markets. Other considerations include accessibility and liquidity in alternative and real asset categories.

Nearly half (42 per cent) of respondents to the survey said momentum is the most difficult issue within their portfolio when implementing factor allocations. They also cited trading costs, volatility and the frequent need to rebalance as challenges in using the strategy. On the positive side, 49 per cent said value was one of the easiest factors when it comes to implementation.

Read: Investment managers stay put on strategy despite geopolitical volatility: survey

As the global adoption of factor investing increases, so does a growing interest in the expansion to fixed-income and multi-asset strategies, according to the survey. However, the most common methods have been single-factor and multi-factor equity strategies.

“With only a third of investors able to allocate to their preferred factor strategies, we see these products as the next evolution post-equities, providing investors with more choice and resulting in the further strengthening of factor investing as a third pillar alongside fundamental active and passive strategies,” said Elsaesser.

Multi-asset products are also of interest, especially in North America and Europe. There, about half of investors said multi-asset, multi-factor approaches are their preferred structure for factor investing.

Read: The challenge of maintaining fixed-income returns as interest rates rise

Copyright © 2017 Transcontinental Media G.P. Originally published on benefitscanada.com

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