Demand for factor-based strategies is increasing globally, with investors planning to almost double allocations over the next five years.
Invesco Asset Management surveyed 66 investors including pensions funds, insurers, sovereign wealth funds, private banks and consultants for its report.
The firm found that 71% of institutional investors, private banks and consultants based in Europe, North America and Asia Pacific expect to increase factor product allocations.
Risk diversification and increasing alpha were cited as the main drivers for factor allocation.
Over two-thirds of respondents already use factors in portfolio construction, half of non-user respondents are considering factor products.
The firm found that there is no lack of belief in the rationale behind factor investing, with 83% of respondents believing that factors help explain outperformance.
However, the research reveals that investors’ focus is less on off-the-shelf factor products and more on strategic factor models and a more holistic multi-factor approach, which explains all of their factor exposures.
For example, German insurers, driven by liquidity requirements and regulatory constraints, are migrating from fundamental investments to smart beta exchange-trade funds and equity factor models to improve risk-adjusted returns.
‘Given the diverse nature of investors, the asset management industry needs to consciously address their clients’ needs for a tailored and consultative approach towards the implementation of factor-based strategies,” said Bernhard Langer, chief investment officer at Invesco.
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