In the 1950s, the concept of a multi-factor strategy may have had investors scratching their heads at first mention, but that has changed over five decades later. A recent study by Invesco, a leading asset manager with more than 30 years of expertise in factor investing, showed that wider adoption of the factor strategy has taken place among North American investors.
The survey included over 300 institutional and wholesale factor investors globally, and results showed that as survey respondents obtained more experience with factor portfolios, the propensity to incorporate them into their overall investment goals increased.
While the strategy itself has been around since the 1950s, the use of factors has only started to materialize in recent years. Since Invesco first polled investors about factors in 2016, North American respondents have increased their adoption of factor strategies at an average rate of 5% per year.
What led to the wider adoption by investors? Vincent de Martel, Invesco’s Factor Solutions Strategist, said it’s a confluence of various factors, but education is first and foremost.
“Invesco has a long history with multi-factor strategies, founding Invesco Quantitative Strategies in 1983, and launching the first multi-factor ETF, Invesco Dynamic Market ETF (PWC), in 2003,” de Martel told ETF Trends. “We have always understood that developing internal capabilities is the first step for factor investors, of which education is a key component.
“Based on the response of the 300 factor investors interviewed for the 2018 study, academic research and support in training are among the top requirements for factor allocation. Invesco has conducted the Global Factor Study since 2016, and in prior years investors have explained that they use multiple resources to develop their own education, including asset managers and consultants.”
Invesco’s study revealed that an investor’s foray into factor investing typically begins with a single factor strategy. As the investor’s comfort level increases, it then leads to the incorporation of other factors as well as a migration from equities into other asset classes like fixed income.
Is the trend for the usage of factor investing on an upward trajectory? According to the study, nearly half of the respondents plan to increase their allocation to factor strategies in the next three years.
Aside from education, the more widespread adoption of factor investing can be attributed to firms having greater internal capabilities to implement the strategy. Furthermore, respondents noted that the availability of a larger number of factor products available on the market has led to more capital allocation to factor strategies.
“Invesco has a 30 year history in factor investing in the U.S., with the factors most used by investors in North America, including Value, Size, Low Volatility and Momentum,” continues de Martel, “The feedback from the Global Factor Investing Study offers Invesco an understanding the investor factor experience provides us with a foundation to create products and portfolios that align with their future intentions.”
Invesco conducted the survey through face-to-face interviews with respondents in Q1 and Q2 2018. The full study seeks to capture the depth, color and context of the factor rationale of global investors.
Related: Invesco Launches New Suite of Factor ETFs
The fieldwork for the study was conducted by NMG Consulting’s strategy consulting practice. Key components of the methodology included the following:
- A focus on the key decision makers within institutional investors, asset consultants, and private banks, conducting interviews using experienced consultants and offering market insights
- In-depth (typically one hour) face-to-face interviews using a structured questionnaire to ensure quantitative as well as qualitative analytics were collected
- Analysis capturing investment preferences as well as actual investment allocations with a bias toward actual allocations over stated preferences
- Results interpreted by NMG’s strategy team with relevant consulting experience in the global asset management sector
As for future trends in factor investing, the growth-fueled momentum factor of the decade-long bull run may appear to be coming out favor, particularly during the October sell-offs. This could portend to value returning to the forefront, but according to de Martel, value has always been at the top of the list or close to it in the last few years.
“For the past three years Invesco has conducted a Global Factor Study, value remained either the #1 or #2 factor used,” said de Martel. “We found that investors tend to see factor investing as a strategic decision, using on average between 2 and 4 strategies. From this standpoint, there is an expectation that a factor allocation, like value, may underperform or outperform through time but will remain a broad factor allocation. In the most current survey, value represented 19% of North American factor investors total portfolio on average. Based on these results, our expectation is that allocations to Value are likely to have remained generally stable after October.”
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