Mega-cap tech stock dominance prompts big shifts in systematic investing

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Oct 28, 2024, 09:30 ET

Tech stock outperformance has led systematic investors to recalibrate their strategies.
52% of investors globally have increased their allocation to Value in the past year.
Investors are adapting faster to changing market conditions – 82% cite this as the key driver for pro-active factor allocation.
Investors' use of systematic strategies is increasingly sophisticated, with growing allocations to alternative asset classes such as real estate and commodities.

ATLANTA, Oct. 28, 2024 /PRNewswire/ -- The extraordinary performance of mega-cap tech stocks has significantly impacted factor returns, creating both opportunities and challenges for systematic investors, according to Invesco.

The findings come from Invesco's ninth annual Invesco Global Systematic Investing Study, Navigating complexity: the rise of systematic strategies in multi-asset portfolio construction, based on the views of 131 institutional and retail investors that collectively manage $22.3 trillion. It reveals a growing sophistication in investors' use of systematic strategies as they adapt to complex and fast-changing market dynamics.

Tech stock dominance requires systematic investing rethink

Invesco found factors aligned with the success of large tech companies such as Momentum, Growth, and Quality have performed exceptionally well over the past year, while Value underperformed¹. Now, concentration risk has driven a turnaround with more than half (52%) of investors increasing their allocations to Value in the past 12 months as they seek a potential hedge.

"The continued growth of U.S. mega-cap technology companies has led to increased concentration in the global equity markets which may create unintended risks in multi-asset portfolios," said Mo Haghbin, Head of Solutions, Multi-Asset Strategies, Invesco. "Investors are increasingly adopting systematic strategies to address this challenge, mitigate concentration risk, and help diversify their portfolios as they navigate this new environment."

Adaptability has enabled systematic investors to perform well in this environment. Over the past 12 months, 46% of systematic investors reported outperformance over both traditional active approaches and market-weighted strategies, contrasting with underperformance of just 8% and 6% respectively.

Need for adaptability drives increased sophistication

The need to react quickly has led to increased uptake of techniques that enable portfolios to immediately adapt to sudden changes in the macro environment. 80% of respondents cited factor tilting strategies as very valuable, while 67% highlighted the importance of asset class and sector rotation models.

The key driver for pro-active factor allocation, cited by 82% of investors, is the desire to adapt to economic cycles. This is also reflected in the rebalancing of factors weights, with nearly all (91%) investors now adjusting their factor weights over time, an increase from 75% in 2023.

As markets become more changeable, investors' time horizons are also decreasing. While 40% of investors still assess performance on a standard 3–5-year time horizon, a third (32%) now use a 2-to-3-year horizon, up from less than a quarter (23%) in 2023.

The rise of alternative asset classes in systematic portfolios

Invesco found a clear trend towards more diverse systematic investor portfolios, including a significant uptick in the use of alternative asset class strategies. The study reveals 40% of investors now apply a systematic approach to real estate (vs. 31% in 2023), 36% to commodities (vs. 26% in 2023), and 34% to both private equity and infrastructure (vs. 32% and 28% in 2023 respectively).

This diversification is enabling investors to build more holistic and integrated multi-asset allocation models. However, the application of systematic strategies to less liquid assets can create challenges, particularly considering liquidity constraints rank as the first- and fourth- most important considerations for institutional and retail investors respectively when building multi-asset portfolios.

Systematic investors are addressing this by using tools such as liquid proxies² or derivatives, which enable them to adjust overall exposure to less liquid asset classes such as real estate, while retaining the ability to quickly rebalance.

"We're seeing higher allocations to private markets across the board, specifically within private credit and real estate," continued Mr. Haghbin. "The combination of these higher allocations and increased accessibility to a larger universe of cost-effective data has led more investors to adopt a systematic approach to alternatives that allows them to access traditionally less liquid asset classes more efficiently."

The data revolution continues

Underpinning the rise of increasingly diversified and sophisticated systematic portfolios is a data revolution transforming the way investors make allocation decisions. The availability of increasingly diverse data sources to inform portfolio allocations has made this possible.

While macroeconomic data (97%), fundamental company financials (81%), and technical analysis indicators (76%) are most often used, the integration of alternative data sources is also gaining momentum, with nearly a quarter (23%) of respondents including alternative data such as satellite imagery, shipping data, and weather information in their models.

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 $1.8 trillion in assets on behalf of clients worldwide as of September 30, 2024. For more information, visit www.invesco.com.

Invesco Advisers, Inc. is an investment adviser; it provides investment advisory services to individual and institutional clients and does not sell securities. Each entity is a wholly owned, indirect subsidiary of Invesco Ltd.

Methodology
Views and opinions are based on current market conditions and are subject to change.

In this study, all respondents were 'systematic investors', defined as investors that employ structured, rules-based quantitative models and algorithms to make investment decisions and build portfolios. We deliberately targeted a mix of investor profiles across multiple markets, with a preference for those that were larger and/or more experienced.

In 2024 we conducted interviews with 131 different pension funds, insurers, sovereign investors, asset consultants, wealth managers and private banks globally. Together these investors are responsible for managing $22.3 trillion in assets (as of 31 March 2024). This core study was supplemented with 20 additional in-depth interviews with highly experienced systematic investors.

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.

The fieldwork for this study was conducted by NMG's strategy consulting practice. Invesco is not affiliated with NMG Consulting.

¹	According to the Global Index Returns (Figure 2.1), Momentum: 35%, Growth: 25.8%, and Quality: 33.9% for relative factor performance as of March 29, 2024. Past performance is not a guarantee of future results.
²	e.g., large-cap equities or government bonds