Factor investors seen largely unfazed by recent underperformance

Almost two-thirds of factor investors report that the performance of their factor allocations met or exceeded expectations in the 12 months to the end of March, according to the latest Invesco Global Factor Investing Study.

According to the study, 59% of existing factor investors plan to increase their allocation.

Georg Elsaesser, senior portfolio manager, quantitative strategies at Invesco, told IPE he was encouraged by the findings given that many factors had underperformed over the past 15-18 months.

“To me it suggests that they have not actually disappointed, but that they have performed in line with what you would have expected had you known which market environment was going to come,” he said.

“The strong belief behind factor investing has not changed because of the recent underperformance.”

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Source: Invesco

Sample size: Institutional = 124, wholesale = 100

In the 12 months leading up to Invesco’s programme of interviews, factors such as momentum, low volatility and quality outperformed market-cap weighted benchmarks, but some of the most common factor strategies, including value and size, underperformed.

Specialists at EDHEC’s Scientific Beta have said a large number of long-only multi-factor strategies have performed disappointingly over the past three years and that the main explanation for this relates to implementation choices of the factor exposures rather than to the factors themselves. 

Face-to-face interviews with 241 institutional and wholesale investors with more than $25trn (€22trn) in assets under management were carried out during April and May for Invesco’s 2019 study.

Another finding was that investors appear split over the relationship between factor investing and ESG: 46% of institutional investor respondents indicated they believe ESG complements the performance of factor strategies, 45% reported they see ESG as not impacting factor strategy performance in either direction, and 9% were of the opinion ESG had a negative impact on factor strategy performance.

Other findings include:

  • The value factor continues to have the widest level of support among both institutional (86%) and wholesale investors (91%);
  • A 3-to-1 majority of factor investors choose an active implementation approach as opposed to a passive one;
  • 70% of institutional investors believe factor investing can be extended to fixed income, up from 62% in 2018;
  • Where investors implement strategies passively via a factor index, almost half of respondents (42% institutional and 44% wholesale) prefer a custom approach to index design

The study report can be found here.

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Readers' comments (1)

  • As this article mentions, Scientific Beta’s research finds that, since it has been possible to offset negative performance for some factors through the good performance of other factors, the issues relate more to the factor exposure implementation choices than to the factors themselves. For instance, in the last three years, the non-control of market beta exposure in a bull market context has prevented the vast majority of multi-factor indices on the market from benefitting fully from the important market risk premium. It is this poor market conditionality rather than the variations in factor returns that explains the disappointing performance of long-only factor offerings over this period.

    In a long-only framework, index and strategy design rarely takes account of the non-factor risks induced by the factor exposure choices. Among these risks, the market beta risk or gap, which often corresponds to an unstable and defensive bias in the construction of factor strategies, is the one that has the most impact over the long term in terms of both the return and volatility of these strategies and it is the one that is controlled the least.

    A full account of Scientific Beta’s research in this area can be found in the following publication: What Really Explains the Poor Performance of Factor Strategies over the Last 3 Years? September 2019, Scientific Beta White Paper

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