Belief in the applicability of factor investing in fixed income has increased significantly among institutional investors and wholesalers, according to the latest annual global factor investing study carried out by Invesco.

Two years ago 59% of respondents held this belief, while in this year’s survey the belief is near-universal, supported by 95% of respondents. Invesco described this as a “dramatic increase”.

Looking just at institutional investors, in 2018 the proportion believing factor investing could be extended to fixed income was 62%, in 2019 70%, and in the 2020 survey it was 98%.

According to Invesco, the rationales for employing a factor approach in fixed income differed slightly from those in equities.

“Investors recognise risk premia as most important to both but ascribe a larger role to market structure as a driving force behind fixed income factors,” the asset manager said in its survey report.

Georg Elsaesser, senior portfolio manager at Invesco, said: “Investors believe fixed income offers clear opportunities due to the nature of market rules or restrictions. Some parts of the market, such as high yield bonds, are not accessible for certain types of investors, creating segmentation and giving rise to exploitable opportunities.

“The relatively high proportion of respondents either investing in fixed income via factors, or considering their introduction, points to the appeal of more systematic approaches to the asset class,” he added.

Georg Elsaesser, Invesco

Georg Elsaesser, Invesco

“Investors also cited the potential for a factor approach to shine a spotlight on alpha generation by active fixed income managers and bring more transparency to the market overall, as has been the case with equities.”

Despite support for the principle of factor investing in fixed income, challenges to implementation remained. For 72% of institutional investors price modelling is one such challenge, according to Invesco’s study.

The asset manager said many investors wanted to implement the strategies in house but lacked access to the right data or ability to make sense of data that is available.

Value, ESG

The study – Invesco’s fifth – is based on interviews carried out in April and May 2020 of 138 institutional and 100 wholesale factor investors, together responsible for managing over $25trn (€21trn) in assets.

Although “caution among investors towards the outlook for their portfolios was noticeable” given the backdrop of the COVID-19 pandemic, 98% of institutional investors indicated they were planning to maintain or increase allocations over the next 12 months.

On the question of the value factor, Invesco found that investors were still committed to it despite it, along with the small size factor, underperforming the market during the survey period; only 5% of institutional investors indicated that doubting the value factor would perform over the full cycle.

Overall, 65% of institutional investors reported that their factor allocations met or exceeded their overall performance expectations in the 12 months leading up to the study.

“While ESG and factor investing are becoming increasingly integrated, the concurrent adoption of both appears to be causing challenges for some investors”

Georg Elsaesser 

On the topic of environmental, social and corporate governance (ESG) considerations, Invesco said that in principle, investors saw “ESG” as aiding factor strategies (64% of institutional investors, 47% of wholesalers), and that the proportion of investors carrying out factor exposure analysis on their ESG portfolios had increased. In this year’s survey 58% of institutional investors reported doing so, up from 34% last year.

The complexity involved in assessing factor exposure was most frequently cited by respondents as the reason for not “exploring the intersections between ESG and factor”, although cost and a lack of tools were also considered significant obstacles.

Elsaesser said: “While ESG and factor investing are becoming increasingly integrated, the concurrent adoption of both appears to be causing challenges for some investors that used to implement them independently of each other.

“This is especially true as many factor products are not ESG integrated, and most ESG products are not factor strategies. More knowledge transfer in terms of how perfectly factor strategies are suited to incorporate ESG is required as factor strategies can help to smoothly implement an ESG focus, and this may even improve a portfolio’s risk/return characteristics.”

The full Invesco report can be found here.

See IPE’s May 2020 special report for more on factor investing

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