Investors using factors to optimize risk, position for post-pandemic recovery; Adoption of dynamic factor strategies expected to accelerate

ATLANTA, Sept. 27, 2021 /PRNewswire/ -- Invesco Ltd., a leading global asset management firm, today released its sixth annual Global Factor Investing Study. The study is based on interviews with 241 factor investors managing over $31 trillion in assets.

This year's study found factor allocations continuing to rise, with 43% of respondents increasing allocations over the past year and 35% planning an increase in the next year.  Only 8% of respondents indicated they planned to decrease factor allocations in the next 12 months. 

Increased allocations were sourced primarily from new money (38% of all respondents) followed closely by fundamental active (37%).  Among North American respondents, fundamental active was a larger source of funding for new factor allocations at 41% versus 31% from new money. 

Research also indicated a continued momentum around factor exchanged traded funds (ETFs) as an important tool for implementing factor strategies among both retail and institutional investors. ETFs can act as the cornerstone of a strategy, as a tactic or portfolio completion tool, which explains why institutional use of factor ETFs is accelerating particularly rapidly. 46% plan an increase in ETF use over the next three years.

"Factor-based approaches are increasingly being adopted by clients, providing investors opportunities that extend beyond purely active and passive strategies," said Mo Haghbin, Chief Commercial Officer and COO, Invesco Investment Solutions. "Our conversations with clients and data from the study both show factor investing is steadily evolving, with dynamism set to accelerate and demand for factor-based portfolio solutions and implementation through ETFs continuing to rise."

Post-pandemic recovery draws investors to value

The value factor received the greatest increase in allocations over the past 12 months at 42% of respondents, followed by quality (31%), low volatility (27%), and momentum (26%). 48% agreed that they were increasing their allocation to value in preparation for a post-pandemic recovery. 

"Optimizing risk" is the most important reason for using factors, with 91% of respondents identifying this objective; "increase returns" follows closely with 85% of respondents.  A clear majority of investors believe their objectives for factor investing have been met or exceeded, although 26% of respondents noted that their objective to "increase returns" had not been met. 

Investors move to dynamic strategies, adjust factors with macro environment

Investors have adopted more complex factor strategies, with 72% now using multi-factor strategies and 30% using dynamic factor strategies. The dynamic approach, which rotates allocations across different factors over time, is set to accelerate, as 29% of investors say their approach has become more dynamic over the past two years and 41% expect to be more dynamic over the next two years.

Almost half (48%) make long-term strategic adjustments to exposures based on expected performance of factors at different points in the economic cycle, but a sizeable minority (30%) makes short-run tactical adjustments to take advantage of pricing opportunities.

There is widespread belief that the applicability of factors can change due to macro/industry trends, with 82% of respondents agreeing that the applicability of factors changes over time.  Investors generally believe the rise of technology (87%) and globalization (72%) have already impacted the applicability of different factors; while only 48% of respondents said that climate change has already impacted factor applicability, 86% agreed it was likely to impact factor applicability in the future.  

"Opportunities and risks change over the course of the market cycle, and asset allocation should too. It's clear investors are now thinking about their factor allocation more dynamically and view factor allocation decisions within the same framework used to make asset-class allocation decisions," continued Mr. Haghbin. "The conversation among asset owners has shifted from 'should I own factors?' to 'how should I own factors?'"

Adoption of factor fixed income strategies continues to rise

Use of factors in fixed income climbed substantially to 55% of respondents in this year's study, versus 40% last year.  More than half of respondents (52%) use both investment factors (such as value/quality) and macro factors (such as duration/inflation) in their factor strategies. 

Nearly half (45%) of investors indicated that the current low-yield macro environment has made the use of factors within fixed income portfolios more attractive, offering an opportunity for additional sources of return and diversification. Control over sources of risk (51%) and diversification (49%) were cited as "very important" reasons for choosing a factor approach over a passive approach.  Respondents saw factor strategies as generally on par with active management in exploiting sources of alpha including risk premiums, behavioral rationales and market structures, although active is still seen as having some advantage over risk management. 

Potential benefits for ESG incorporation lead investors toward a factor-based approach

In recent years there has been a focus on increasing sustainable investing and the study highlights the rapid increase in appetite for incorporating ESG in a factor methodology. In 2021, 78% of respondents, all of which are factor investors, indicated they incorporated ESG in their portfolios. Enhancing investment performance is the top driver of ESG adoption this year, cited by 75% of respondents, followed closely by client/beneficiary demand at 72%. 

Factor investing is seen as more compatible with ESG when compared to a market-weighted approach but behind a fundamental active approach. Despite this, respondents were more likely to say that ESG was pushing them towards a factor approach, partly due to the ability to replicate a quantitative methodology across different parts of a portfolio.

To view Invesco's full sixth annual, 2021 Global Factor Investing Study please click here.

Sample and Methodology
The fieldwork for this study was conducted by NMG's strategy consulting practice. Invesco chose to engage a specialist independent firm to ensure high-quality objective results. Key components of the methodology include:

• A focus on the key decision makers 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
• Results interpreted by NMG's strategy team with relevant consulting experience in the global asset management sector

In 2021, the sixth year of the study, we conducted interviews with 241 different pension funds, insurers, sovereign investors, asset consultants, wealth managers and private banks globally. Together these investors are responsible for managing $31.1 trillion in assets (as of March 31, 2021).

In this year's study, all respondents were 'factor users', defined as any respondent investing in a factor product across their entire portfolio and/or using factors to monitor exposures. We deliberately targeted a mix of investor profiles across multiple markets, with a preference for larger and more experienced factor users. The breakdown of the 2021 interview sample by investor segment and geographic region is displayed in the full study.

Institutional investors are defined as pension funds (both defined benefit and defined contribution), sovereign wealth funds, insurers, endowments and foundations.

Retail investors are defined as discretionary managers or model portfolio constructors for pools of aggregated retail investor assets, including discretionary investment teams and fund selectors at private banks and financial advice providers, as well as discretionary fund managers serving those intermediaries.

Invesco is not affiliated with NMG Consulting.

About Invesco
Invesco Ltd. is a global independent investment management firm dedicated to delivering an investment experience that helps people get more out of life. Our distinctive investment teams deliver a comprehensive range of active, passive and alternative investment capabilities. With offices in more than 20 countries, Invesco managed $1.5 trillion in assets on behalf of clients worldwide as of June 30, 2021. For more information, visit www.invesco.com.

Important Information
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed.  This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision.  As with all investments there are associated inherent risks.  This should not be considered a recommendation to purchase any investment product. This does not constitute a recommendation of any investment strategy for a particular investor.   Investors should consult a financial professional before making any investment decisions if they are uncertain whether an investment is suitable for them. Please obtain and review all financial material carefully before investing.  Past performance is not indicative of future results. Diversification does not guarantee a profit or eliminate the risk of loss. The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice.  These opinions may differ from those of other Invesco investment professionals. Invesco Advisers, Inc. is an investment adviser; it provides investment advisory services to individual and institutional clients and does not sell securities.

Media Relations Contact: Matthew Chisum 212.652.4368 [email protected]

SOURCE Invesco Ltd.

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