A new study released Monday by Invesco finds that demand for and adoption of factor-based strategies will continue to climb.
Seventy-one percent of institutional investors surveyed said they expected to increase factor allocations in the next five years.
In addition, 70% of respondents reported that they already used factors in portfolio construction, with risk reduction being the primary motivation, followed by increased alpha and improved diversification.
Half of non-user respondents said they were considering factor capabilities.
NMG, a consultant, conducted in-depth, face-to-face interviews with 66 key decision makers within asset consultants, insurers, pension funds, sovereign wealth funds and private banks globally.
According to Invesco, many respondents said they had made small allocations as part of an initial trial period for factor investing, and expected to increase these allocations as they continue to look for alternative sources of returns in the low-yield environment.
Their responses suggested growth was likely particularly in multi-factor quantitative strategies, internal factor models and fixed income and liquid alternative products.
Tailored Approach Key
The research showed that investors buy into the rationale behind factor investing, which involves selecting securities based on attributes associated with higher returns, such as style, size and risk.
Eighty-three percent of respondents agreed that factors helped explain outperformance.
At the same time, their focus was less on off-the-shelf factor capabilities and more on strategic factor models and a more holistic multi-factor approach that explains all of their factor exposures.
Bernhard Langer, Invesco’s chief investment officer for quantitative strategies, noted in a statement that because of investors’ diverse nature, “the asset management industry needs to consciously address their clients’ needs for a tailored and consultative approach towards the implementation of factor-based strategies.”