Nearly half of all factor investors in EMEA plan to increase their allocations

A majority of factor investors globally plan to maintain or increase their allocations over the next 12 months, according to a study by investment management firm Invesco. The Invesco Global Factor Investing Study, now in its fifth year, also found that investors in Europe, the Middle East and Africa are more likely to make additional allocations to their factor strategies (47 per cent) than their counterparts in North America (31 per cent) or Asia Pacific (44 per cent). Factor investing is an approach that involves targeting specific drivers of return across asset classes, such as value, momentum and dividend yields, among others. Investing in factors can help improve portfolio outcomes, reduce volatility and enhance diversification. “Factor strategies have performed as expected and sentiment towards factor investing has remained very positive, even considering the peculiar conditions and lower returns for some factors over the past couple of years,” Georg Elsaesser, senior portfolio manager in quantitative strategies at Invesco, said. “Factor investing is here to stay and is being increasingly adopted by more investors of every size. It is important to stress that factor investors are long term, whose belief that factor premia results in excess return over the long run underpins a sense of pragmatism in the face of short-term volatility.” The rise in factor allocations has been driven by a broader adoption of factors into additional asset classes such as fixed income and exchange-traded funds. This year, 65 per cent of institutional and 67 per cent of wholesale investors reported that their factor allocations met or exceeded their overall performance expectations in the 12 months leading up to the study, which interviewed 138 institutional and 100 wholesale factor investors responsible for managing more than $25 trillion in assets. In the Middle East, the number of investors turning to factor investing has been slowly increasing. “Investors in the region are committed to assessing risk and return of factor investing strategies over a long-term horizon, as opposed to a speculative, short-term strategy, identifying additional drivers as they gain experience,” Zainab Kufaishi, head of Middle East and Africa at Invesco, said. In global equity markets, factors such as momentum, quality and low volatility outperformed over the survey period, while factors such as value and small size underperformed, according to the Invesco study, which was conducted between April and May this year. Indebtedness and liquidity concerns weighed particularly on the small size and value factors, especially early in the interview period when many firms rushed to raise capital due to Covid-19, the Invesco survey found. Record numbers of institutional and wholesale investors are now using factor strategies within their fixed-income allocation, the study said. Four in 10 respondents said they now use factors in fixed income, while more than a third are actively considering doing so. Only 17 per cent of institutional investors said they were not considering using factor strategies for fixed-income allocation. “The relatively high proportion of respondents either investing in fixed income via factors, or considering their introduction, points to the appeal of more systematic approaches to the asset class,” Mr Elsaesser added. The belief that factor investing can be applied to fixed income is now close to universal, having increased from 59 per cent in 2018 to 95 per cent this year, the study found. Both institutional and wholesale investors are increasingly using ETFs to implement active factor strategies. Six out of 10 institutional investors now make use of ETFs, accounting for an average of 14 per cent of their factor portfolios. In the wholesale segment, more than two thirds of investors make use of ETFs, accounting for half of factor portfolios overall, the research found. The number of factor investors using ESG (environmental, social and corporate governance) principles is also steadily increasing. This year, 84 per cent of institutions and 71 per cent of wholesalers, all factor investors, had an ESG policy in place, while more than half were already incorporating, or considering incorporating, ESG into their factor portfolio. “While ESG and factor investing are becoming increasingly integrated, the concurrent adoption of both appears to be causing challenges for some investors that used to implement them independently of each other,” Mr Elsaesser said. “This is especially true as many factor products are not ESG-integrated, and most ESG products are not factor strategies.”