15 September 2017
Invesco
US$ 37bn +
In assets under management
50 +
Investment professionals
Since 1983
Factor-based active
4
global locations
The balance between risk and return efficiency
Invesco Global Factor Investing Study 2018
Our third annual global factor investing study builds on the insights from our previous two years’ studies. This year we’ve sought the views and opinions of 300 institutional and wholesale investors through face-to-face interviews.
We explore global themes from adoption challenges, to ways of implementing and future allocation intentions, and supplement these with case study interviews and sophisticated factor user insights. In addition, we’ve broken out regional themes through three regional supplements.
The findings from this year’s interviews have been distilled into five key themes to provide practical insights into how investors are evolving to allocate to this increasingly important investment approach.
2018 key themes
1. What’s in a name – how do investors think about factor terminology?
2. Learning the ropes: factor investors are building experience
3. Factor allocations and applications are expanding
4. Implementation barriers are falling away
5. Factor experience has been a positive one for most investors
In recent years, interest in factor-based investing has increased meaningfully as market participants seek precise and systematic solutions to achieve their investment objectives
Invesco has been a leader in factor investing for more than 30 years, and currently manages more than $211 billion* in assets for clients around the world. Our active and factor-based investment strategies aim to deliver client outcomes that go beyond the limitations of traditional benchmark-centric active management and traditional passive investing.
*Source: Invesco, as of 31 March, 2018
Factor investing is often viewed as the third pillar of investing, alongside active and passive strategies.
What is factor investing?
Factor investing is often viewed as the third pillar of investing alongside active and passive but it is also described as an alternative way of looking at the market. We believe factor investing has the potential to drive outperformance supporting a better risk-adjusted trade-off within a truly diversified portfolio.
Unlike traditional stock picking, this style of investing builds on exposures to particular traits, called factors, that exhibit superior returns relative to a broad market-capitalisation weighted index benchmark. A factor can be thought of as a quantifiable characteristic of a financial asset which to a large part explains the return and risk characteristics of a portfolio.
Source: Invesco. For illustrative purposes only.
Why consider factor investing
There is evidence to suggest that factor investing not only has the potential to drive outperformance in the long-run but also with a greater risk-adjusted trade-off.
This potential outperformance is driven by the fact that markets are inefficient while investors are not rational by nature. Factor investing seeks to exploit these market inefficiencies and behavioural biases. Factor investing also seeks to harness factor premiums in return for bearing additional risk to the market.
Risk premiums
For bearing additional risk over the broad equity market e.g. an undesirable return pattern
Market structure
Markets may be inefficient because of restrictions and limitations
Behavioural rationales
Markets are inefficient due to behavioural biases of participants
Why now?
Recent episodes of market volatility and associated portfolio drawdowns have resulted in investors asking why some asset class balanced portfolios didn’t deliver the diversification benefits they had expected.
In parallel to this, investors return and cost expectations are becoming more conservative with the investment focus shifting towards delivering better risk-adjusted returns. With investors now looking more closely at the nature of the financial market risks to which they are exposed, factor analysis can be a particularly useful tool in this respect.
Factor investing is a quickly-developing area of the financial markets. With more data and computational power at their disposal than ever before, analysts are able to further develop their understanding of factor investing and support their findings through strong academic evidence. Through research, factor investing has shown it has the ability to exploit market inefficiencies and behavioural biases to earn factor premiums.
Over several decades factor investing has evolved from an academic concept to a strategic initiative.
Bernhard Langer
Chief Investment Officer Invesco Quantitative Solutions
Market uncertainty
Realization of the correlation between asset classes
Sharp portfolio draw downs
High volatility
Cost awareness
Low interest rates
Regulation
Learn more about factor investing
Investment capabilities
Invesco is an expert practitioner in factor science and continues to push the boundaries of portfolio construction. With over 30 years’ experience we are a true solutions business that incorporates sophisticated, scientific skills in risk premia, strategic and tactical factor allocation including dynamic allocation of investment themes.
* Source: Invesco as at March 2018.
IQS*
Invesco ETF*
US$ 173bn +
In assets under management
17
Investment professionals
4th
Largest ETF provider
IFI*
US$ 0.5bn
In assets under management for factor investing in fixed income
170 +
Investment professionals
10
locations in key markets
Next steps
Related insights
15 September 2016
Georg Elsaesser, Portfolio Manager, Invesco Quantitative Strategies
16 April 2018
Jay Raol, Director, Invesco Fixed Income Quantitative Research and Shawn Pope, Marco Quantitative Analyst, Invesco Fixed Income
12 September 2016
Georg Elsaesser, Portfolio Manager, Invesco Quantitative Strategies
22 September 2016
Michael Fraikin, Global Head of Research and Georg Elsaesser, Senior Portfolio Manager
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Important information
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.