Institutional investors in Asia expect to increase their investments into factor strategies over the next five years in order to raise returns and reduce risk, with fixed income and multi-asset strategies gaining more favour, according to a new study being unveiled by Invesco today (Tuesday).
Asia Pacific investor respondents to the ‘Global Factor Investing Study’ said they had allocated an average of 10% of assets under management to factor strategies as of June 30, up 3% from 12 months earlier, the study said. The investors added that they expect to increase amount this further, to 16% by 2022.
Factor investing strategies seek to invest into assets that share similar factors rather than trying to group them by sectors, geographies, or investment styles. The factors tend to be quantifiable characteristics such as value, quality and momentum, and are designed to help investors outperform traditional, market capitalisation-based investing approaches.
Stephen Quance, director of factor based investing for Asia Pacific at Invesco, told AsianInvestor the increase in Asian investors’ allocations into factor strategies could have been funded by reducing either pure passive or active strategies, which can influence return expectations.
“When assets come in from passive strategies, investors tend to look at capturing excess returns in a fairly controlled manner,” he said. “If they decide to allocate from an active strategy by getting rid of an alpha seeking manager for instance, the allocation could be in search of higher returns by accepting more risk.”
Respondents to Invesco’s report placed a desire to increase returns as the biggest reason to use and invest more into factor strategies, with risk reduction coming in a close second. In contrast, European and North American investors primarily invest into the strategies to reduce risk and control cost.
The study results that were made available to AsianInvestor did not break down the exact percentages of these respondent preferences. Additionally, Quance declined to reveal the average level of returns from the existing factor strategies of the survey respondents, or the performance of Invesco’s factor products.
Seeking new strategies
To date more than 50% of the respondents’ investments into factor strategies have been into either single or multiple equity factor strategies, said Quance.
The focus on equity strategies is particularly evident in Asia Pacific, added Yoon Ng, director at Spence Johnson (acquired recently by Broadridge Financial Solutions), a data intelligence consultancy that tracks institutional investment flows. However, she noted that there are also signs that this is beginning to change.
“We are now seeing increasing interest in fixed income and multi-asset strategies, which should improve the innovation and improve the diversity of strategies in this space.”
Quance concurred, noting investors in Asia Pacific and across the world are seeking more investments into these areas.
Investors in North America and Europe have already shown interest in multi-asset products, with 52% and 47% of respondents from the respective regions stating that multi-asset was their preferred structure for factor products. The survey did not offer a similar figure for Asia Pacific respondents.
The study also revealed that factor product providers appear to have more work to do in the fixed income space. Over two-thirds (68%) of global respondents believed factor strategies could be used for fixed income investing, but just one-third (32%) said they are using factor strategies in their fixed income portfolio.
Interest in factor-based strategies has been growing across Asia Pacific in recent years, with North Asia institutional investors in particular showing more demand, said Quance.
Ng agreed, and noted that Taiwan’s Bureau of Labor Funds’ uses smart beta strategies, a large subset of factor investing, for up to 30% of its overseas equity portfolios. Japanese institutions have also become more interested in factor-based investing, she added.
The Government Pension Investment Fund is acting as a role model to Japanese institutional investors to some degree. In July it shifted an initial 3% of its domestic equity allocations to three newly-created indices that were constructed around environmental, social and governance (ESG) factors.
Australian and New Zealand pension funds have also been adding smart beta strategies into their overall portfolios over the past few years, and are seen by many factor fund experts as being among the best versed across the region.
New Zealand Supreannuation Fund offers just one example. In August 2016 it appointed Northern Trust Asset Management (NTAM) to manage two new factor investing mandates.
However, Quance admitted that a lot more needs to be done: “Many Asian institutions are not set up to optimise the opportunities presented by factor investing,” he said.
One issue is internal oversight. Many asset owners have separate passive and active investment teams, but factor investing is not a perfect fit for either one. That can leave the organisations struggling to decide which teams should oversee the strategies and how best they should be monitored.
Not everyone is a fan of factor investing either. Last year, the deputy chief executive of Malaysia’s $161 billion Employees Provident Fund, told AsianInvestor that he doesn't believe that smart beta can deliver strong returns.
The main argument broadly against smart beta, which typically focuses on factors such as low volatility or value to pick assets, is that a sharp reversal of the trend is likely to hurt portfolio performance.
The Invesco study conducted with 108 different global pension funds, insurers, sovereign wealth funds, financial advisers, asset consultants, private banks and intermediaries across 19 countries that collectively account for more than $7 trillion in assets under management. There were 29 participants from the Asia Pacific.