The term is sometimes also known as “smart Beta” investing – unpacking drivers of return and then tracking indices that capture the returns of these drivers.
Rising inflation and volatile markets haven’t deterred institutional and retail investors from using “factor-based” approaches for securing returns, according to a survey by Invesco.
The term “factor investing” is about targeting specific drivers of return across asset classes, such as yield, value, quality and momentum. Those arguing for this approach say they can deliver higher portfolio returns and make investments less volatile. The term is sometimes also known as “smart Beta” investing – unpacking drivers of return and then tracking indices that capture the returns of these drivers.
Invesco said respondents to its survey still generally think that factors are well-suited to managing risk during market turbulence, with 67 per cent agreeing that factor investing helped them manage market volatility over the past year. A similar number, 64 per cent, indicated their faith in factors having grown over the previous 12 months.
The Invesco Global Factor Investing Study is based on interviews with 151 institutional and retail factor practitioners managing over $25.4 trillion in combined assets.
Factor allocations continue to rise, with 41 per cent of respondents increasing allocations over the past year and 39 per cent planning an increase in the next year. Only 1 per cent of respondents decreased allocations to factor over the past year.
Respondents expect value, low volatility, and quality to be the best performing factors over the next 12 months. A majority (over 80 per cent) think that their factor allocations have met or exceeded the performance of their fundamental active strategies, while 64 per cent indicated that their factor allocations met or exceeded performance versus market-weighted strategies.
Among other details, 41 per cent said they rarely (every three to five years) change their factor definitions – down from 66 per cent in 2021. Some 43 per cent of respondents are changing their factor definitions frequently (every one to three years) – up from 16 per cent in 2021.