Factor investing expected to rise over next five years: report

As yields remain low and markets remain volatile, institutional investors will increasingly turn to factor investing in the next five years, research from Invesco has found.

Seventy per cent of global respondents – which include pension funds, insurers, asset consultants, private banks and sovereign wealth funds – currently use factors when building their portfolios, with risk reduction as the primary driver, while 15 per cent are considering introducing them.

Many respondents noted they’ve invested some assets into factors as an initial trial but do plan to increase the allocations. As they seek alternative sources of returns, respondents are also likely to turn to multi-factor quantitative strategies, internal factor models and fixed income and liquid alternative products.

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“Our research confirms that both popularity and desire for even greater adoption of factor investing are growing,” Bernhard Langer, chief investment officer of quantitative strategies at Invesco, said in a release. “But given the diverse nature of investors, the asset management industry needs to consciously address their clients’ needs for a tailored and consultative approach towards the implementation of factor-based strategies.”

Factor investing strategies, in which securities are chosen based on attributes that have been associated with higher returns, can vary depending on geography, the report notes. While sovereign wealth funds in Asia have turned towards internal risk factor models, German insurers are looking towards smart beta exchange-traded funds and equity factor models.

The study also found investors want to both retain control over their factor investments and want training support and consulting advice from the broader asset management community.

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There is clearly a call for the asset management industry to show a greater understanding of how investors want to manage and assess factors in their portfolios, and how asset managers can help with this,” said Langer. “As investors and their investment service providers become more comfortable with factor capabilities, we expect greater separation between assessing and managing factors to emerge as investors realize they can retain control while outsourcing the strategy execution.”