There’s been a large increase in factor investing overall in the past year, as well as — significantly — the number of investors in North America who think it can be extended to fixed income, according to the fourth annual Invesco Global Factor Investing Study 2019-U.S. and Canada.
Invesco’s study found that respondents have continued to boost their factor allocations overall, both in the number of factors they target and their usage of multi-factor strategies, the Atlanta-based investment management firm said Monday.
Almost half (45%) of the investors surveyed globally increased factor allocations in the past year, while 65% of North American investors planned to increase their factor allocations over the next three years, according to Invesco.
Meanwhile, more than 66% of respondents also reported that their factor investing performance met or surpassed expectations for the performance of their traditional active or market-weighted allocations, Invesco pointed out. Investors are also maintaining their conviction in factor investing, with 77% of North American respondents waiting at least three years before judging performance, it said.
But there was one major development seen in the study that really stood out, according to Vincent de Martel, Invesco senior solutions strategist, who told ThinkAdvisor: “What struck me this year really is the increase in proportion of factor investors who are really ready to adopt factor investing in the fixed income space” now. There had been some interest among factor investors in fixed income “for a few years … but this year we have over three-quarters of wealth managers who view the approach of factor investing now being applicable to fixed income,” he said.
De Martel, who’s been studying factor investing for about 10 years, chalked up that significant interest in the fixed income space to issues including the market for fixed income being “challenged with low interest rates.” That’s causing many investors to start thinking how they can make their assets “work harder,” he explained, adding many of them are turning to factor investing in fixed income “to try and enhance their allocations.”
A whopping 61% of institutional investors and 76% of wealth managers now view the approach as being applicable to fixed income, Invesco found. The growing trend is linked closely to widespread recognition that the returns of all fixed income portfolios, whether they’re built using a factor-based approach or not, will be implicitly driven by exposure to factors, it said.
“The Invesco Global Factor Study demonstrates that there is wider, more dynamic adoption of factor investing, suggesting growing maturity and sophistication in the factor market,” according to Mo Haghbin, chief operating officer of Invesco Investment Solutions. “Factor investing has shifted from academic theory to an actionable strategy for global investors and the study allows us to understand what issues are key to their investment decisions,” he said in a statement.
This year’s study also found that, in aggregate, investors are: (1) More widely interested in factor fixed income strategies and have opinions on which factors should work best; (2) moving to a more dynamic approach for implementation of factors by a three-to-one majority; and (3) taking more defensive, long-term factor positions, Invesco said.
Haghbin also pointed to another factor having an impact on the growing interest in fixed income factor investing: “With interest rates now at record lows and around a quarter of bonds globally trading with negative yields, attention has turned to alternative ways of accessing the asset class,” he said, adding: “Respondents see factor investing as a solution that could target sources of returns transparently and cost effectively, even in a challenging yield environment.”
Of the potential factors identifiable within fixed income, belief in a yield/carry factor was the most prevalent as 64% of respondents identified that as the top factor, which could explain the increase to such strategies over the past 12 months, according to Invesco. That was followed by liquidity, value and quality (54%, 46% and 42%, respectively), it said.
Bond market inefficiencies coupled with the almost four-decade bull-market run have helped to support the case for active management within fixed income, Invesco pointed out. “Factor investing in fixed income includes many of the benefits that have driven the strong performance of active fixed income strategies, while also offering transparency and a potentially attractive cost,” it said.
This year’s findings suggested that as investors move along the experience curve, demand for fixed income factor strategies will likely grow further, it said.
The Invesco Global Factor Study also addressed implementation and found investors increasingly think capturing the benefits of factor investing is partially dependent on adopting a dynamic approach. Most factor investors are now selecting an active implementation versus a passive approach — with active strategies executed via segregated mandates, commingled mutual funds, customized investment solutions and exchange-traded funds, Invesco said.
ETFs are being used for dynamic factor investing by almost 60% of large institutional investors (those with more than $50 billion in assets under management), typically in combination with other investment vehicles, Invesco found.
A large percentage of the 70-page study dealt with the relationship between factor investing and environmental, social and governance investing. “With ESG moving beyond simplistic exclusion of securities to include quantitative scoring, questions arise as to whether ESG and factor investing are synergistic or conflicting,” the report said. The “vast majority” of factor investors who made up the respondents have also incorporated ESG into their investment strategies, Invesco noted. But there was a difference of opinions among them on whether the two forms of investing complemented one another or had no impact. While almost 50% indicated they thought ESG and factor investing complemented each other, nearly the same amount indicated they thought each one neither complemented nor distracted from the other. Only 5-10% of respondents indicated they believed ESG distracted from factor effectiveness, according to the study.
The fieldwork for this year’s study was again conducted by NMG’s strategy consulting practice. Invesco opted to engage a specialist independent firm to “ensure high-quality objective results,” it said. Invesco, meanwhile, conducted face-to-face interviews with 241 factor investors, broken out as 132 institutional investors and 109 wholesale investors, it said, noting those investors combined were responsible for managing more than $25 trillion in assets as of March 31.