Factor investing strategies becoming more popular for fixed income: survey

The use of factor investing is on the rise among institutional investors, according to a new global survey by Invesco.

“Factor investing has shifted from academic theory to an actionable strategy for global investors and the study allows us to understand what issues are key to their investment decisions,” said Mo Haghbin, chief operating officer of Invesco Investment Solutions, in a press release.

Globally, 45 per cent of survey respondents said they’ve increased their allocations to factors in the last year. Meanwhile, 65 per cent of North American investors said they intend to increase their use of factors in the coming three years. Overall, 66 per cent of investors said their factor allocations have met or exceeded expectations.

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The survey also found factor investing is becoming increasingly accepted as part of fixed income, with 61 per cent of institutional investors saying factors were relevant to the asset class.

“With interest rates now at record lows and around a quarter of bonds globally trading with negative yields, attention has turned to alternative ways of accessing the asset class,” said Haghbin. “Respondents see factor investing as a solution that could target sources of returns transparently and cost effectively, even in a challenging yield environment.”

Among specific factors, yield/carry was considered the top factor by the 64 per cent of investors, followed by liquidity (54 per cent), value (46 per cent) and quality (42 per cent).

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The survey noted that inefficiencies in the bond market, as well as a heavily established bull market for the asset class, are both contributing arguments for increasing active management of fixed income. As experience in using factors becomes more widespread, it will likely be further applied to fixed income. Besides active investing, survey respondents said they’re taking a more active approach to factors generally. Among those still using passive strategies, exchange-traded funds remain the most popular tool among mid-sized investors, while larger institutional players prefer a custom approach.

“The increase in dynamic factor investing is a key sign of how comfortable investors are becoming in implementing factor strategies,” said Haghbin.

In another trend, there’s been a tilt towards the defensive use of factors, with an eye to long-term investment strategies, as evidenced by the growing prominence of factors like low volatility, momentum and quality. The underperformance of the value factor, meanwhile, appears to be a result of the current market environment, rather than a disbelief in its potential usefulness as a factor itself.

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“A concurrent increase in the use of other factors, particularly low volatility, momentum and quality, has resulted in a ‘flattening out’ of factors in use, and a narrowing in the gap between the most used and least used factors,” said Vincent de Martel, senior strategist for Invesco Investment Solutions. “Our study found that most investors seek to capture a dynamic, long-term approach to factor implementation that includes periods of underperformance and outperformance across all factors.”