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Invesco Finds Factor Allocations Expanding Across North America

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Factor allocations and factor applications among North American investors are expanding, according to Invesco’s latest Global Factor Study.

“The concept of factor investing — an investment strategy in which securities are chosen based on certain characteristics and attributes — has existed since the 1950s,” the report states. “However, the strategy has only gained prevalent acceptance in recent years.”

Since Invesco first polled investors about factors in 2016, North American respondents have increased their adoption of factor strategies at an average rate of 5% per year.

In a survey of more than 300 institutional and wholesale factor investors globally, of which 90 came from North America, Invesco found that as respondents gain experience in utilizing factor portfolios they are increasing their usage.

The take-up of factor investing has already been significant among North American respondents, with factor allocations near 20% compared with the sample global average of 13%.

Nearly half of the respondents also plan to increase their allocation to factor strategies in the next three years.

Invesco found that while asset owners often commences their factor journey with a single strategy, as time goes by they tend to implement additional factor strategies and consider how to extend their factor portfolio from equities to fixed income and multi-asset.

For example, the survey found that less experienced investors in North America use an average of 2.5 smart beta strategies and 1.6 active quant strategies. For the more sophisticated investors, the average is 4 smart beta strategies and 3 active quant strategies, indicating broadening usage within portfolios. These strategies are most commonly being applied within equity portfolios, according to Invesco.

North American investors are starting to apply factors to fixed income and multi-asset portfolios, but as with investors in other regions, the expansion is currently lower than the sample global average. According to the survey, 37% of those surveyed globally are currently using or considering adding factors in fixed income compared with 27% in North America. Meanwhile in multi-asset portfolios, 44% surveyed globally are currently using or considering adding factors, whereas 34% are doing the same in North America.

The equities tilt of North American factor investors shows up in the most common factors currently being used. According to the survey, the factors most used by investors in North America include value, size, low volatility and momentum.

The top three barriers to adoption of factor strategies globally are internal capability, lack of products and lack of belief.

According to the survey, most investors strongly felt that past barriers to adoption have been rapidly falling away, as more firms have a greater internal capability to implement factor investing.

In addition, those investors interviewed also cited the availability of a larger number of factor products as reasoning for an increased factor allocation.

Barriers that are notably higher for North American investors are concerns around transparency and crowding, although the latter remains a lower ranking barrier.

Invesco conducted the survey through face-to-face interviews with respondents in the first and second quarter. The 300 respondents included different asset consultants, insurers, pension funds, sovereign investors and private banks globally.

In this year’s study, all respondents were “factor users,” defined as any respondent investing in a factor product across their entire portfolio.

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