Factor investing gains traction in Middle East

Investors in Europe, the Middle East and Africa are more likely to be making additional allocations to factor strategies

  
Businesswoman using a digital tablet with graphs on it in a modern office. Image used for illustrative purpose.

Businesswoman using a digital tablet with graphs on it in a modern office. Image used for illustrative purpose.

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UAE - Factor investing is being increasingly adopted by more investors in the Middle East and across the globe, according to a study that found that 97 per cent of factor investors are planning to either maintain or increase their factor allocations over the next 12 months.

The study by Invesco found that investors in Europe, the Middle East and Africa (EMEA) are more likely to be making additional allocations to factor strategies (47 per cent) than their counterparts in North America (31 per cent) or Asia Pacific (44 per cent).

Factor investing, which has for years demonstrated its potential to outperform the general market, is an investment strategy whereby securities are chosen based on their characteristics and attributes that have tended to offer favorable risk and return patterns over time.

Zainab Kufaishi, head of the Middle East and Africa at Invesco, said the number of investors turning to factor investing to better manage portfolios has been increasing.

"Investors in the region are committed to assessing risk and return of factor investing strategies over a long-term horizon, as opposed to a speculative, short-term strategy, identifying additional drivers as they gain experience. They see factor investing as a strategy with a distinct profile that can combine advantages of both active and passive investment approaches," said Kufaishi.

The study, the largest of its kind, interviewed 138 institutional and 100 wholesale factor investors, responsible for managing over $25 trillion in assets in total.

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.

The 2020 study found the belief that factor investing can be applied to fixed income is now close to universal, having increased from 59 per cent in 2018 to 95 per cent this year. According to the research, investors believe fixed income is a good fit for a factor-based approach, with 63 per cent agreeing that factors in fixed income are equally as important as in equities.

Georg Elsaesser, senior portfolio manager, Quantitative Strategies at Invesco, said sentiment towards factor investing has remained very positive, even considering the peculiar conditions and lower returns for some factors over the past couple of years. "Factor investing is here to stay and is being increasingly adopted by more investors of every size"

"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. Investors cite 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," said Elsaesser.

 

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