Despite market turbulence, most respondents report factors meeting or exceeding expectations
Investors’ faith in factor investing has remained strong in spite of the volatile market environment stirred up by COVID-19, according to a new study from Invesco.
In its latest Global Factor Investing Study, which observed respondents’ sentiment on factor investing during April and May this year, Invesco found the majority were confident in their factor allocations as over 65% said their expectations were being met or exceeded amidst the initial wave of pandemic-driven volatility.
The report draws from interviews with 238 confirmed “factor users” around the world including pension funds, insurers, sovereign investors, asset consultants, wealth managers, and private banks, which together represented a grand total of US$25.4 trillion in assets under management.
“[W]hile this kind of turbulence and ongoing uncertainty can test even the most seasoned institutional investors' commitment to their long-term strategies, we are very pleased to see that factor investors collectively have persevered through short-term discomfort,” said Mo Haghbin, chief commercial officer and COO, Invesco Investment Solutions.
Even though they had yet to understand the full impact of the pandemic on their portfolios, the factor investors surveyed showed a continued willingness to increase factor allocations, which they were assessing against long-term risk and return objectives.
Reflecting that long-term mindset, just 5% of institutional investors and 16% of advisors expressed doubts that value’s recent underperformance would pass, and maintaining or increasing exposure to it would pay off over time as the factor performs over the full cycle. At the same time, investors reported making slight tactical tilts toward quality and momentum based on prevailing factor metrics.
The report also pointed to a surging belief that factor investing can be used in the fixed-income space, a sentiment shared by 95% of this year’s respondents compared to just 59% in 2018. Two fifths of investors polled this year said they use factors in fixed income, and more than two thirds said they’re actively considering introducing them into their portfolios.
The top drivers of adoption among institutional investors has consistently been risk reduction, followed by increasing returns. But over the last two years, Invesco said there’s been an increased focus on controlling portfolios and improving benchmarking, which suggests a growing consideration of factors in a whole-portfolio context rather than just within specific sleeves or asset classes.
Aside from potentially shedding light on active fixed-income managers’ ability to generate alpha, respondents suggested that a factor approach could bring more transparency to the market. But for more than half (56%) of respondents, a lack of consensus around definitions and terminologies represented a significant barrier to adoption; others cited the difficulties of working with different external managers across fixed-income factor mandates, as well as the difficulty of having discussions on fixed-income factors without a set of unified definitions.
Multiple survey findings point to a growing sophistication among factor investors. Rather than just buying factor strategies, 93% of institutions and 82% of advisors said they intend to continually update their approaches, whether it’s through incremental changes to data sources and execution or more fundamental changes to allocations. There’s also wider acceptance of multi-factor strategies, with 81% of institutional investors and 73% of advisors reportedly adopting such approaches.
As investors look for tactical tools to gain factor exposure, ETFs emerged as a prominent vehicle as it represented three quarters of the average factor allocation among wealth managers, and half of factor portfolios overall in the wholesale space. ETFs have also become a fixture among a majority of institutional investors, making up 14% of their factor portfolios on average.
“Investors' confidence in their factor allocations, even in the depths of the COVID-19 crisis, is a testament to both the growing appeal of factor allocations and investors' commitment to long-term approaches," said Marcus Axthelm, director of Factor Investing, Americas, Invesco.
