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IPE special report May 2018

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Asset owners seek to bring factor investing in-house: survey

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A growing number of asset owners are bringing factor-based investment strategies in-house, according to a survey by Invesco.

The asset manager quizzed 108 investors and intermediaries with more than $7trn (€6trn) in assets under management, and found nearly a quarter (23%) already managed some factor assets in-house. A further 31% stated an intention to develop internal factor capabilities.

More than half of respondents were planning some degree of internal management, Invesco’s Global Factor Investing study reported.

“[This] decision to build internal factor capability is based on a desire to achieve similar risk-return outcomes to those offered by external managers, at a lower cost. Also at work is a desire to exert greater control over the factor investing proposition,” Invesco said.

The survey also reported that demand for factor allocations was expected to rise significantly over the next five years, as institutional investors sought out a viable “third pillar” to equity and fixed income investments amid volatile financial markets.

European institutional investors increased their factor allocations to 19% in 2017 from 17% in the previous year, Invesco said, and were expected to continue increasing allocations to factor products over the coming years.

Factor allocations were the largest among European insurers and sovereign wealth funds, driven primarily by blended risk management and return generation opportunities over cost. The survey found that concerns around increasing volatility of equities and fixed income were pushing investors to look beyond geographic and sector diversification to factors as a means of diversifying and managing macro or cyclical risks.

Georg Elsaesser, senior portfolio manager for quantitative strategies at Invesco, said: “The growth in factor investing over the past 12 months demonstrates the value it can play in an investor’s portfolio. It is still relatively early in the adoption process for many, but our respondents make it clear that it will become more prominent over time.”

European factor investors were increasing allocations to both smart beta and active quantitative strategies, reweighting from fundamental and passive equity strategies, and fixed income allocations, Invesco found.

The study said that as the global adoption of factor investing increased, investors were also expanding into fixed income and multi-asset strategies.

However, the majority of investors (68%) were not able to invest in their preferred types of strategy, the report found, meaning there was a growing demand for new factor products. Elsaesser said that, with central bank policies having driven interest rates down to near record-low levels, investors were increasingly aware that the quality of diversification in their portfolios was now much weaker than it used to be, driving demand for fixed-income factor strategies to reduce risk and improve diversification and performance.

He added: “With only a third of investors able to allocate to their preferred factor strategies, we see these products as the next evolution post-equities, providing investors with more choice and resulting in the further strengthening of factor investing as a third pillar alongside fundamental active and passive strategies.”

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