Fixed Income Factor Investing Growing Significantly: Invesco

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.