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Investors employing factor strategies are continuing to increase their allocations globally. The story is no different in the Middle East, where investors are turning to factor investing to better manage their portfolios.
For beginners, factor investing is a strategy that chooses securities on attributes that are associated with higher returns.
Average allocations to factor investing strategies have increased from 2018 to 2019 for both institutional (16 percent to 18 percent) and wholesale (11 percent to 14 percent) investors globally, Invesco said in its study that conducted face-to-face interviews with 241 global institutional and wholesale factor investors responsible for managing over $25 trillion in assets.
The Invesco Global Factor Investing study cited reduced risk, enhanced returns and lower costs as the three leading factors consistently driving adoption in the region.
Zainab Kufaishi, Invesco’s head of institutional business for the Middle East and Africa, said, “We have seen a steady increase in the number of investors in the Middle East turning to factor investing to better manage their portfolios.”
Nearly half (45 percent) of the investors surveyed by Invesco in Asia Pacific (APAC), Europe Middle East and Africa (EMEA) and North America increased factor allocations in 2019.
In EMEA, 59 percent of the respondents plan to increase their allocations over the next three years. Also, nearly 70 percent of respondents have also reported that their factor investing performance met or exceeded expectations in 2019.
"In the Middle East for both institutional and wholesale investors, the top two reasons for investing in factor strategies are to reduce risk and increase return. Investors are attracted to the ability to be able to directly target investment factors that have delivered excess returns in the past while at the same time exerting more control over the risks they are exposed to," Georg Elsaesser, Senior Portfolio Manager, Quantitative Strategies at Invesco told Zawya.
“For institutional investors, the third most important reason for introducing factor investing is reducing cost (with factor investing often offering a cost advantage over fundamental active allocations) while for wholesale investors the third most important reason is the opportunity to outperform fundamental active managers,” he added.
Trends in Factor Investing
Georg explained the trends in factor investing as the movement of factor investing toward the mainstream continues at pace: “Early adopters want to do more with their factor allocations, including active and customized approaches and expanding to fixed income. Existing factor investors have been increasing allocations with over half of the respondents in the study intending to increase allocations over the next three years, this pattern of adoption is likely to continue.”
Most investors who have deployed factor strategies have taken a long-term view, believe that capturing the benefits of factor investing is in part dependent on a dynamic approach to implementation, the report noted.
“The majority (62 percent) of investors in the EMEA region wait at least 3 years before judging the performance of their factor strategies, including 18 percent that wait at least 5 years. Investors are therefore treating their factor allocations more like an asset class and are not making decisions based on short term performance,” Georg told Zawya.
The study also pointed out that majority of factor investors choose an active implementation approach with active strategies executed through segregated mandates, co-mingled mutual funds and exchange traded products (ETPs).
For active implementation, the study found, there is a preference for segregated mandates – documented agreement with a fund manager on how client wants investments to be managed - among larger institutional and wholesale investors.
“At the same time, 79 percent of investors in the EMEA region prefer an active approach to factor implementation. This means that their factor strategies can be changed regularly at the discretion of the manager. Therefore, despite taking a long-term view they are not adopting a policy of ‘set and forget’ and believe it is important to regularly adapt how their factor strategies are being implemented,” explained Georg.
While mid-sized and small investors are more likely to opt for co-mingled mutual funds. Notably the use of ETPs is not limited to one type of investor or to just the implementation of passive strategies.
According to the Invesco report, investors have also taken decisions about which factors to include or exclude.
One of the results is a reduction in exposure to the value factor (one of the first and most widely adopted factors) and a concurrent increase in the use of other factors such as momentum, quality and low volatility.
Fixed Income Factors Attract Investors
The past 12 months have seen a notable increase in the proportion of respondents who believe factor investing can be extended to fixed income. Globally, some 70 percent of institutional investors and 78 percent of wholesalers now view the approach as being applicable, up from 62 percent and 57 percent respectively in 2018, the report noted.
Despite demand for the application of factor strategies within fixed income, a shortage of appropriate products is still evident.
Zainab Kufaishi added: “This year’s results suggest that as regional investors become more experienced in factor investing, the demand for fixed income factor strategies is rising. Yet challenges remain as investors believe their product needs in fixed income are not yet adequately addressed.”
Nearly nine in ten respondents described this asset class as not well covered by current factor offerings (this reflects perceptions of coverage in terms of quality, not just quantity). As such, some 42 percent of institutional investors added to equity factors in 2019, while 35 percent added to fixed income factors. For wholesalers, the figures were 46% and 32% respectively
(Reporting by Seban Scaria; Editing by Daniel Luiz)
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