Factor investing has become a third pillar in portfolios alongside active and passive, with increased demand among institutional investors, according to Invesco (IVZ).
The firm’s second annual Global Factor Investing Study, which surveyed 108 pension funds, insurance companies, sovereign wealth funds, consultants and other investors representing more than $7 trillion in assets, found institutional investors expect to increase allocations to 18% of portfolios in the next five years.
Investors said they currently allocate 17% of their portfolios to factor investing, up from 15% in the manager’s 2016 study.
North America leads the adoption, driven by insurers and state pension funds. In the 2017 study, North American investors said they had increased their allocations to 19% from 16% a year previous.
The primary reason for factor allocations is risk, according to institutional investors, ahead of return and cost drivers. The preferred strategy remains smart beta, with funding for these allocations coming from fundamental active strategies, said the study.
Among European institutional investors, 19% allocate to the strategies compared with 17% in 2016. In the region, insurance companies and sovereign wealth funds are the biggest clients, with risk and return considerations the main drivers. Also in Europe, 62% of those surveyed invest in quantitative strategies, vs. 38% in smart beta. Asia-Pacific institutional investors increased their allocation to 10% from 7% in the past year.
“Apparently people are increasingly aware that factor exposures drive return and risk, especially in equity markets,” said Georg Elsaesser, senior portfolio manager, quantitative strategies at Invesco, in a telephone interview.
Mr. Elsaesser added that factor investing has become a third pillar in portfolios and said the conversation with clients has moved “from saying here’s the product do you want to buy it; to where are you, what do you need, how can we help. It is a much more consultative approach — we are going away from saying we have the solution, do you have the problem, toward we have a problem, can you construct a solution for that?” he said.
Respondents to the study also showed demand for fixed-income factor strategies, with 68% believing that the theory behind factor investing can be applied. However, only 32% use factor strategies within their fixed-income portfolios.
Further, 52% of North America and 47% of European clients said their interest has expanded into multiasset strategies.