Wednesday 20 November 2019
 
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ANALYSIS

Zainab Kufaishi

59pc of EMEA factor investors ‘plan to raise allocation’

DUBAI, 28 days ago

Investors employing factor strategies are continuing to increase their factor allocations, said investment management company Invesco in a new report, adding that In EMEA, 59 per cent of factor investors plan to increase their allocations over the next three years.

The fourth Invesco Global Factor Investing Study, the largest of its kind, conducted face-to-face interviews with 241 global institutional and wholesale factor investors responsible for managing over $25 trillion in assets.

This year’s study provides deeper insight into the paths of adoption, experiences, methods of implementation, future intentions and challenges to be overcome in factor investing. Nearly half (45 per cent) of the investors surveyed in APAC, EMEA and North America increased factor allocations in 2019. Average allocations to factor investing strategies have increased from 2018 to 2019 for both institutional (16 per cent to 18 per cent) and wholesale (11 per cent to 14 per cent) investors globally.  

Also nearly 70 per cent of respondents have also reported that their factor investing performance met or exceeded expectations in 2019.

With factor investing, investors look to improve risk and return expectations for their portfolios by targeting specific performance characteristics of a security.  The study found that respondents have continued to increase both the number of factors they target and their usage of multi-factor strategies. They have also taken more active decisions about which factors to include or exclude.

One of the results is a reduction in exposure to the value factor (one of the first and most widely adopted factors) and a concurrent increase in the use of other factors such as momentum, quality and low volatility. Despite some questioning whether the value factor remains as effective, it continues to be the factor with the widest level of support among both global wholesale (91 per cent) and institutional investors (86 per cent).  

Georg Elsaesser, senior portfolio manager, Quantitative Strategies at Invesco said: “The movement of factor investing toward the mainstream continues at pace.  Early adopters want to do more with their factor allocations, including active and customized approaches and expanding to fixed income. Existing factor investors have been increasing allocations with over half of the respondents in the study intending to increase allocations over the next three years; this pattern of adoption is likely to continue.”

Zainab Kufaishi, Invesco’s head of institutional business for the Middle East and Africa said: “We have seen a steady increase in the number of investors in the Middle East turning to factor investing to better manage their portfolios.  Reducing risk, enhancing return and reducing costs continue to be the three most important factors driving adoption in the region. Most investors who have deployed factor strategies have taken a long-term view, though believe that capturing the benefits of factor investing is in part dependent on a dynamic approach to implementation.”

This year’s study found that a 3-to-1 majority of factor investors now choose an active implementation approach as opposed to a passive one – with active strategies executed through segregated mandates, co-mingled mutual funds and exchange traded products (ETPs).

For active implementation, the study found, there is a preference for segregated mandates among larger institutional and wholesale investors, while mid-sized and small investors are more likely to opt for co-mingled mutual funds. Notably the use of ETPs is not limited to one type of investor or to just the implementation of passive strategies. These products play an important part in the implementation of active strategies for nearly 43 per cent of large institutional investors (AUM>$50BN), usually in combination with other types of vehicles.

And where investors still implement strategies passively via a factor index, almost half of respondents (42 per cent institutional and 44 per cent wholesale) prefer a custom approach to standard index design. These custom approaches may offer better management of factors and more control over factor definitions and metrics.

Investors view success in factor investing as being contingent on constant evolution through the introduction of new factors, definitions, data sources, technologies and asset classes.

Fixed income factors continue to attract investors attention

The past 12 months have seen a notable increase in the proportion of respondents who believe factor investing can be extended to fixed income. Globally, some 70 per cent of institutional investors and 78 per cent of wholesalers now view the approach as being applicable, up from 62 per cent and 57 per cent respectively in 2018.

With yields now at record lows and around a quarter of bonds globally trading with negative yields, attention has turned to alternative ways of adding value from the asset class. Respondents saw factor investing as a solution that could target sources of returns transparently and cost effectively even in the current environment.

Sixty-four per cent of investors identify yield / carry as the top factor that can be identified in fixed income, partly explaining the increase to such strategies over the past 12 months, followed by liquidity, value and quality (54 per cent, 46 per cent and 42 per cent respectively).

Despite demand for the application of factor strategies within fixed income, a shortage of appropriate products is still evident, with nearly nine in ten respondents describing this asset class as not well covered by current factor offerings (this reflects perceptions of coverage in terms of quality, not just quantity).  As such, some 42 per cent of institutional investors added to equity factors in 2019, while 35 per cent added to fixed income factors. For wholesalers, the figures were 46 per cent and 32 per cent respectively.

Kufaishi added: “This year’s results suggest that as regional investors become more experienced in factor investing, the demand for fixed income factor strategies is rising.  Yet challenges remain as investors believe their product needs in fixed income are not yet adequately addressed.”

ESG considerations impact factor investing strategies

Looking ahead at market developments, this year’s study found large numbers of global and regional investors incorporating Environmental, Social, and Governance (“ESG”) considerations alongside factors – some 85 per cent of respondents are doing so in parallel  and nearly half believe that ESG adoption complements factor investing adoption.
 
However, it is an area where many asset owners are uncertain about the interaction of ESG and factor initiatives. Over a quarter (28 per cent) of institutional investors see ESG as a factor in its own right, while 40 per cent see ESG as a combination of factors. To understand these issues better, asset owners need assistance from external partners, given the complexity of analysis and a lack of readily available data and tools.

Kufaishi concluded: “Overall, our latest Global Factor Investing Study shows rising commitment to factor strategies among large institutional investors in the region. The fact that factor allocations are continuing to spread across portfolios suggests it is gaining a strategic footing in investing, not just as a low-cost substitute for traditional active management, but as a more transparent and efficient tool for building a holistic portfolio.” – TradeArabia News Service




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