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Investors are committing to factor investing for the long term, according to Invesco’s annual global factor investing study, released Monday.

Interviews for the study were conducted during the market turbulence of April and May, and investors still reported continued adoption, especially within fixed income.

“There’s no question that volatility has been a defining characteristic of markets this year,” Mo Haghbin, chief commercial and chief operating officer at Invesco Investment Solutions, said in a statement.

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Yet factor investors collectively have persevered, Haghbin said. “The evolution of factor investing continues to attract a wide variety of investors, which in turn drives the industry to continue to develop and refine factor offerings to meet those needs.”

For the new study, NMG Consulting conducted interviews with 238 pension funds, insurers, sovereign investors, asset consultants, wealth managers and private banks globally, which together managed $25.4 trillion in assets as of March 31. All respondents were “factor users,” defined as any respondent investing in a factor product across their entire portfolio or using factors to monitor exposures.

According to the survey, 65% of investors said factor performance had met or exceeded expectations — this following the initial shockwaves the pandemic sent through financial markets.

Invesco noted that factor investors understood that the full effect on their portfolios was not yet clear, but continued to increase factor allocations despite a challenging period and divergent factor performance as they assessed risk and return objectives over a long-term horizon.

Investors demonstrated this long-term approach to factor investing through their commitment to value investing. Despite recent underperformance, only 5% of institutional investors and 16% of advisors doubted that value would perform over the full cycle.

This continued interest in the value factor occurred at the same time that investors reported slightly tilting exposures to the quality and momentum factors for tactical reasons based on factor metrics, according to Invesco.

Confidence in Fixed Income Factors 

Ninety-five percent of respondents in the new study believed factor investing could be applied to fixed income, up from 59% in 2018.

In terms of actual application, 40% of those surveyed said they used factors in fixed income, and 35% were actively considering introducing them into their portfolios.

For institutional investors, risk reduction has consistently been the most important driver of adoption, followed by increasing returns, Invesco said. However, the increased focus on controlling portfolios and improving benchmarking over the last two years suggests that investors are increasingly considering factors in the context of the whole portfolio, rather than in select sleeves or asset classes.

Investors also pointed to the potential for a factor approach to spotlight alpha generation by active fixed income managers and bring more transparency to the market, similar to the advantages they already see with using factors in equities.

Some challenges to investor adoption remain, according to the survey. For 56% of institutional investors, the challenge was a lack of consensus around definitions and terminology.

Some also pointed to the difficulties of working with different external managers across fixed income factor mandates and the lack of unified definitions when discussing fixed income factors internally.

Factor Investors’ Growing Sophistication 

The survey found that investors recognize the need to adapt and evolve factor strategies as capabilities develop or the market environment changes.

Ninety-three percent of institutional investors and 82% of advisors said they updated their approaches continually, whether by making incremental changes to data sources and execution, or effecting more fundamental changes to allocations.

One example of this growing sophistication is the continued adoption of multifactor strategies, the use of which is now a several-year trend. Almost half of the study’s respondents said they ran strategies where multifactor allocations are built up by use of numerous single-factor allocations.

Investors are also increasing their usage of ETFs as they search for more tactical tools against a challenging economic backdrop.

For wealth managers in the study, ETFs are usually the primary vehicle for gaining factor exposure, making up three-quarters of the average factor allocation, while a majority of institutional investors now use ETFs, accounting for an average of 14% of their factor portfolios.

In the wholesale segment, more than two-thirds of investors employ ETFs, accounting for half of factor portfolios overall. This includes the use of low-volatility strategies to help manage overall portfolio volatility by both institutional and wholesale investors.

Respondents said the underlying index methodology was often an important selection criterion, with different ETFs targeting the same factor or factors not always seen as equals.

Investors emphasized the importance of rigorous due diligence when selecting an ETF, as well as the need for full transparency and education regarding composition and methodology from funds providers.

This was particularly important in the selection of multifactor and multi-asset products, where similar-looking products can differ widely in terms of definitions, weightings and rebalancing methodologies.

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