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Invesco study finds factors rule for wholesale and institutional investors


The fifth Invesco Global Factor Investing Study has found that the use of ETFs to invest in factor strategies has grown significantly. For wholesale investors, the study found that ETFs now account for 50 per cent of factor allocations, standing at 35 per cent for private banks and rising to 74 per cent for wealth managers.

Institutional investors are making use of ETFs for factor investing – ETFs account for almost a quarter (24 per cent) of DC pension schemes factor allocations, Invesco says, and the study found institutional investors are making use of ETFs to gain factor exposure, with ETFs accounting for an average of 14 per cent of their overall factor portfolios. The figure is 17 per cent for DB schemes, 11 per cent for insurance firms, and 9 per cent for Sovereign Wealth Funds. Liquidity, transparency, price, and ease of use cited by institutional and wholesale investors as the main advantages for using ETFs.

Overall, 97 per cent of investors are planning to maintain or increase factor allocations – either through ETFs or other vehicles – over the next 12 months, according to the study.

For wholesale peers, price (71 per cent) was the dominant factor, followed by ease of use (64 per cent) and then liquidity (52 per cent). Least important for both segments was using ETFs as a single point of access for specific or multiple factors, the study found.

Georg Elsaesser Senior Portfolio Manager, Quantitative Strategies at Invesco says: “For respondents investing in factor strategies based on passive indexing strategies, ETFs are particularly valued for their ease of use and price. For these types of enhanced or ‘smart’ beta applications investors reported being attracted to transparent, rules-based products.

“ETFs are seen as a good tool for building a portfolio and managing risk, particularly when viewed against the more limited option of market cap-weighted products. The growing depth of ETF products on offer, including the supply of multi-factor products, was seen as important in helping with this advance, making factor investing more accessible to a wider range of investors and allowing factor strategies to fulfil more diverse portfolio objectives.”

ETFs are also increasingly being used to implement active factor strategies, with a number of investors this year moving towards ETFs having previously implemented factors through swaps or other derivatives executed via an investment bank, the study found. In comparison to these vehicles, ETFs were seen as preferable due to their increased transparency.

This year, (65 per cent) of institutional and (67 per cent) of wholesale investors reported that their factor allocations met or exceeded their overall performance expectations in the 12 months leading up to the study. 

Elsaesser says: “Factor strategies have performed as expected, even considering the peculiar conditions and lower returns for some factors over the past couple of years, and sentiment towards factor investing has remained very positive. Factor investing is here to stay and is being increasingly adopted by more investors of every size. It is important to stress that factor investors are long term, whose belief that factor premia results in excess return over the long run underpins a sense of pragmatism in the face of short-term volatility.

“For instance, while the previous decade has been difficult for investors in the value factor, this edition of the study finds that most investors remain committed to the value factor, believing its run of underperformance as a temporary phenomenon” 

ESG has been a principle area of focus among both institutional and wholesale investors for some time and last year’s Invesco report noted that factor adoption has often taken place in parallel with ESG adoption. This year 84 per cent of institutions and 71 per cent of wholesalers (all of them factor investors) had an ESG policy in place, while more than half were already incorporating, or considering incorporating, ESG into their factor portfolio.

Elsaesser says: “Looking forward it is likely that ETFs will play an important role in the ESG space. More recent ESG adopters often lack experience and face implementation challenges and are eager for simple, cost effective solutions. In addition, ETFs do not necessarily have to be passive only, they can also wrap truly active investment strategies and tailored solutions for instance, in order to establish customised ESG integration, including enhanced reporting.”

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