ATLANTA, Nov. 28, 2016 /PRNewswire/ -- According to a
new independent global study on factor investing, demand and
adoption of factor-based strategies will continue on an upward
trend. Specifically, the study found that demand is likely to surge
in the next five years, with 71% of respondents expecting to
increase factor allocations [figure 1]. Over two thirds of
respondents (70%) already use factors in portfolio construction,
with risk reduction as the primary driver, followed by increased
alpha, a measure of risk-adjusted performance, [figure 2], and half
of non-user respondents are considering factor capabilities.
The qualitative and quantitative research was gathered from
in-person interviews with global pension funds, insurers, sovereign
wealth funds, asset consultants and private banks.* The study was
commissioned by Invesco, a leading global investment firm.
Many respondents explained that they had made small allocations
as part of an initial trial period for factor investing, but plan
to increase these allocations. Growth is expected particularly in
multi-factor quantitative strategies, internal factor models and
fixed income and liquid alternative products, as investors continue
to seek alternative sources of returns in a sustained low-yield
environment of low interest rates and stock market volatility.
For institutional investors: a tailored, strategic approach
to factors is key
There is strong belief in the rationale behind factor investing,
with 83% of respondents agreeing that factors help explain
outperformance. However, the research reveals that investors' focus
is less on off-the-shelf factor capabilities and more on strategic
factor models and a more holistic multi-factor approach which
explains all of their factor exposures.
"Our research confirms that both popularity and desire for even
greater adoption of factor investing are growing. But given
the diverse nature of investors, the asset management industry
needs to consciously address their clients' needs for a tailored
and consultative approach towards the implementation of
factor-based strategies," said Bernhard
Langer, CIO of Quantitative Strategies at Invesco.
For example, while sovereign investors in Asia have been the fastest adopters of
internal risk factor models, German insurers, driven by liquidity
requirements and regulatory constraints, are migrating from
fundamental investments to smart beta ETFs and equity factor models
to improve risk adjusted returns. While in the UK, post retail
distribution review (RDR), charge caps on default funds and
stakeholder engagement have facilitated growth in smart beta
products so that UK defined contribution pension funds are now
using factor products because they offer a more cost-efficient
route to diversification.
"Global trends in factor investing are resonating across the
U.S. as well, with investors seeking efficient vehicles for yield
and risk protection, driving flows into smart beta fixed income
strategies and low volatility ETFs," said Dan Draper, Invesco's Global Head of
PowerShares.
Institutions prefer internal control of strategies, but with
hands-on support from asset managers
Despite a strong preference for internal control over factor
models [figure 3], a lack of internal capabilities was cited as the
greatest adoption barrier with a rating of 8.3 out of 10 [figure
4].
While institutions want to control their factor investments,
they explicitly requested support from the wider asset management
industry, citing training support and consulting advice as the two
most effective industry propositions to address their concerns
[figure 5].
"There is clearly a call for the asset management
industry to show a greater understanding of how investors want to
manage and assess factors in their portfolios, and how asset
managers can help with this," said Langer. As investors and their
investment service providers become more comfortable with factor
capabilities, we expect greater separation between assessing and
managing factors to emerge as investors realize they can retain
control while outsourcing the strategy execution."
Many investors explained that consultants should be well
positioned to be the natural partner—with practical application
expertise—for an institution looking to develop a strategic
factor-based approach, referencing their experience supporting
institutions with asset liability models as an example.
According to the study, only 9% of respondents cited academic
institutions as best placed to assess the role of factors within
their portfolio [figure 3]. This is ultimately where asset managers
can play an extended partnership role with institutional investors,
bringing hands-on support and global capital markets teams to
assist with trade execution and liquidity services as required.
Private banks specifically stated that the greater use of ETFs,
indexing, smart beta and active quantitative products alongside
fundamental active management are driving greater cost
efficiencies.
"Factor strategies are opening new doors to portfolio
diversification, and we've found that—along with growing investor
adoption—there is increasing demand for fund providers to
demonstrate their holistic understanding of clients' needs beyond
product selection to also recommend practical insights for
portfolio implementation," said Draper.
For more information on PowerShares Factor Investing, please
visit:
https://www.invesco.com/portal/site/us/financial-professional/etfs/strategies/factor-investing/.
Notes to editors
*Sample & methodology - The fieldwork for this study was
conducted by NMG's strategy consulting practice. Invesco chose to
engage a specialist independent firm to ensure high quality
objective results. NMG conducted in-depth (typically 1 hour)
face-to-face interviews with key decision makers within 66
different asset consultants (AC), insurers (INS), pension funds
(PEN), sovereign wealth funds (SWF) and private banks (PB)
globally.
Figure 1
Photo - http://photos.prnewswire.com/prnh/20161127/443069
Figure 2
Photo - http://photos.prnewswire.com/prnh/20161127/443068
Figure 3
Photo - http://photos.prnewswire.com/prnh/20161127/443067
Figure 4
Photo - http://photos.prnewswire.com/prnh/20161127/443066
Figure 5
Photo - http://photos.prnewswire.com/prnh/20161127/443065
Figure 6
Photo - http://photos.prnewswire.com/prnh/20161127/443064
About Invesco
Invesco is an independent investment
management firm dedicated to delivering an investment experience
that helps people get more out of life. NYSE: IVZ;
www.invesco.com.
About PowerShares by Invesco
PowerShares by Invesco is
leading the Intelligent ETF Revolution® through its
family of 140 domestic and international PowerShares
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There are risks involved with
investing in ETFs, including possible loss of money. Actively
managed ETFs do not necessarily seek to replicate the performance
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subject to certain other risks. Please see the current prospectus
for more information regarding the risk associated with an
investment in the Fund.
Factor investing is investment strategy in which securities are
chosen based on attributes that have been associated with higher
returns.
The risks of investing in securities of foreign issuers,
including emerging market issuers, can include fluctuations in
foreign currencies, political and economic instability, and foreign
taxation issues.
Beta is a measure of risk representing how a security is
expected to respond to general market movements. Smart Beta
represents an alternative and selection index based methodology
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both in active or passive vehicles. Smart beta funds may
underperform cap-weighted benchmarks and increase portfolio
risk.
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SOURCE Invesco Ltd.