Factor investingâ€”the use of stock characteristics like size or style to make investment decisionsâ€”is talked about a lot. But how popular is it really? Invesco recently surveyed more than 300 institutional and wholesale investorsâ€”including pension funds, insurance companies, private banks, and financial advisorsâ€”about how they view and use factor investing, and their plans going forward. Here are three important takeaways from the survey in our view
Factor investing has gone mainstream
Once the purview of academics, factor investing is not experimental any more. But that doesnâ€™t mean itâ€™s too popular, either. Factor strategies still represent less than 20% of their equity and fixed income allocations, according to four out of five respondents. But itâ€™s taking funds away from both active managers and traditional market cap-weighted indexes like the S&P 500.
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â€œFrom one aspect, investors are starting to understand that there are systematic drivers of excessive returns that their active managers produce, so they start to look into the same strategies at a lower cost or more transparency,â€ explains Vincent De Martel, strategist at Invesco behind the survey, â€œThe other is, investors that have large assets in market-cap weighted indexes are trying to generate better performance, and they think they can do that by leaping from market cap-based to factor-based strategies.â€
Investors are combining factorsâ€”and are happy with the results
Depending on the region, type, and experience, investors typically implement two to four factor strategies on average, the survey found. Some 60% of respondents said they intend to increase allocations over the next three years as the performance of factor strategies has been largely in line with or exceeded expectations. â€œThe claim of factor investing to be able to exploit market opportunities in a systematic and low cost manner has been borne out to a significant degree,â€ De Martel writes in the report.
Value is still the most important factor
Value is still the most popular factor. Despite its continuous underperformance over the past decade, value remains the most popular factor. Itâ€™s used by eight out of 10 respondents, and the rate is even higher in the North America region. To De Martel, thatâ€™s a good sign. â€œYou might have all these marketing and buzz around factor investing, but investors are not swayed by that,â€ he told Barronâ€™s, â€œThey do their own due diligence and try to gather more information. Once theyâ€™ve done that, they understand that there are periods of underperformance or outperformance, not only for value, but other factors as well. Itâ€™s very encouraging to see it as a sign of investor maturity.â€ Indeed, the S&P 500 Value Index provided a modicum of safety during Octoberâ€™s decline: It fell 5.5% last month, while the S&P 500 dropped 7%.
Like any other investment strategy, factor investing is no guarantee of higher return or less risk. In fact, they might bring some unwanted exposure or periods of underperformance. But if you are tempted to join the party, remember: Be wise in choosing, be diverse in allocating, and be patient in holding.
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