Factor investing is on the rise, as Invesco’s 7th annual Global Factor Investing Study revealed that 67% of investors globally said the approach had helped them manage market volatility over the last year.
The study, which analysed the views of 83 institutional investors and 68 retail investors overseeing $25.4 trillion in assets, revealed confidence in factor investing, which involves targeting quantifiable characteristics that explain differences in stock returns, had been strengthened markedly over the last nine months.
There was an increase in demand for fixed income factors, according to the study, as bond markets suffered their worst year in decades, ending a prolonged bull run for the asset class.
Over 50% of investors believed the current market environment made factor investing in fixed income more attractive.
“With the changing landscape for fixed income investments, the need to analyse and risk-manage portfolios through a factor lens has risen substantially. This is especially true in EMEA, where geopolitical risks are being felt strongly,” said Georg Elsaesser, senior portfolio manager, quantitative strategies at Invesco.
This year 54% of respondents said they used both macro and investment factors, and just 14% targeted investment factors in isolation.
Respondents were using factor investing most in government bonds (76%) and corporate bonds (75%), which Invesco said reflected both the depth and liquidity of these markets as well as their product offering.
Respondents expected factor-based strategies to outperform during inflation where economic growth is slow.
Factor allocations rose over the year, with 41% of investors reporting they had increased allocations over the last year and 39% reporting they planned to increase allocations over the coming months.
Just 1% had decreased allocations to factor. Best performing factors were broadly predicted to be value, low volatility, and quality in the next year.
Elsewhere, Invesco found increased application of factors within ESG investing. Improved performance was cited by 72% of respondents as the advantage of using factors to help implement ESG while 66% said they believed factors could be used to enact their ESG objectives, a 42% increase from 2018.
Lack of consensus around methodology remains a barrier to implementation, however.
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