Factor investing well-suited for market turbulence: investors

Oksana Patron

15 November 2022

Investors believe that factor-based strategies help them manage the risk during market volatility, outperform in a slow growth environment, and integrate better environmental, social, governance (ESG) factors, according to Invesco.

Invesco’s “Global Factor Investing Study”, which was based on interviews with more than 150 institutional and retail factor practitioners managing combined US$24.4 trillion in assets, also found that factor investing in fixed income proved particularly attractive to many investors wanting to diversify their portfolios and fuelled by the end of bond markets multi-decade bull run.

The inflationary environment combined with rising interest rates and slower economic growth, which made investors re-evaluate their portfolios, caused 67% of investors believed factor investing would be helpful in risk managing and a higher frequency among investors to update their factor strategies.

At the same time, factor allocations continued to rise, with 41% of respondents declaring they had increased their allocations over the past year and 39% planning to do so in the next year, the study confirmed.

Respondents also said they expected value, low volatility, and quality to best performing factors over the next 12 months.

According to the study, only 1% of investors decreased allocations to factor over the past year.

Stephen Quance, Global Director, Factor Investing at Invesco, said that the fact investors increased their support and exposure to factor strategies through this latest global bear market cycle stressed how comfortable and confident they became with a factor approach as a pillar of investing alongside active and passive.

“This is a trend we have seen across geographies including Asia Pacific where factors can systematically target specific outcomes in a risk-off, rising rate environment,” he said.

The study also revealed that within fixed income asset classes, respondents used factor investing the most in government bonds (76%) and corporate bonds (75%), reflecting both the depth and liquidity of these markets as well as the number of products available and they anticipated that factor investing will spread further in fixed income, with a clear majority (71%) believing they would use high yield bonds as part of their fixed income factor exposure in the next five years.

As far as ESG was concerned, the ESG performance was seen by many as creating an opportunity for factor investing and improved performance was cited by 72% of respondents as the advantage of using factors to help implement ESG while 66% of investors believed factors can be used to implement their ESG objectives, an increase from 2018 (42%).

However, the lack of consensus around methodology remained a barrier to implementation, with respondents’ keen for further research in this area.