Zainab Kufaishi, Invesco’s Head of Institutional Business for the Middle East and Africa.
DOHA: Institutional and wholesale investors are increasingly adopting factor-based allocations as part of their portfolios, according to the third annual Invesco Global Factor Investing Study. The trend is expected to continue with three fifths of investors overall (64percent of institutional and 56 percent of wholesale investors) planning on increasing factor allocations by 2021.
Over 300 wholesale and institutional investors with assets under management (AUM) totaling more than $19trillion were interviewed for this comprehensive study.
The key driver for further increases in allocations by investors is, by some distance, better net performance, followed by cost-effectiveness and two dimensions of risk reduction.
While the sentiment of global investors is to increase their factor allocations over the coming three years, this is even more the case for Asia Pacific factor investors. Over three quarters (77 percent) of respondents intend to increase factor allocations, in comparison to 57 percent in Europe and 54 percent in North America.
Georg Elsaesser, Senior Portfolio Manager, Quantitative Strategies at Invesco said: “Factor investing’s progress is forcing a structural change within the industry, creating a true third pillar in the investment world, distinct from traditional active and market cap weighted passive. Investors – both wholesale and institutional - see factor investing as a distinct competency requiring specific rather than generalist expertise from elsewhere in the internal team.
“Our Study has found that ‘factor’ has become the preferred overarching term for the philosophy and practice of systematic investing. Other terms in common usage such as ‘smart beta’ and ‘active quant’ are located lower in the hierarchy as product-related terms denoting different types of factor strategies.” Zainab Kufaishi, Invesco’s head of institutional business for the Middle East and Africa said: “Fluctuating oil prices and headwinds in the global economy have led regional investors to seek a better understanding of the drivers of risk and return in their portfolios. We are witnessing a growing appetite for factor investing in the Gulf region as sovereign wealth funds embrace factor-based investing to monitor or build portfolios as they seek better risk adjusted returns.” Style factors continue to be the most widely used set of factors, and within this, value remains the most popular (78 percent of factor investors), followed by low volatility (62 percent) There are some significant regional variations; in Europe, factor investors make less use of value than the global average and more use of high yield. Asia Pacific investors favour value and quality, while North American investors prefer value and size.
For the first time the study looked at how investors prefer to implement their factor strategies. For smart beta strategies, exchange traded vehicles such as ETFs are clearly the preferred vehicle of factor investors (51 percent), followed at a distance by segregated mandates (23 percent) and other types of pooled vehicles (6 percent).
European smart beta investors are avid users of ETFs and similar products (55 percent), as are North American users of smart beta strategies (59 percent).
Asia Pacific investors on the other hand currently lean towards segregated mandates (63 percent) reflecting the larger sizes of their portfolios and factor allocations; and less local availability of exchange traded products.
The Study has found similar or better results when comparing the performance of active quant, a factor strategy with more precise risk and return potential. A third (33 percent) of institutional investors have found this form of factor investing has surpassed expectations compared to traditional active.
