Factor investing is rapidly becoming the third pillar of investing, after active and passive, and professional fund buyers have been developing their fixed income factor expertise, according to US asset manager Invesco.
Factor investing seeks to break down market returns into their basic components, and systematically research and exploit these characteristics, in a bid to create higher returns.
Invesco’s senior portfolio manager for quantitative strategies, Georg Elsaesser, said that the barriers to entry have fallen dramatically in the last few years and professional fund buyers were now more aware of factor investing methodology.
“There is now a whole breadth of factor-related strategies out there alongside the two traditional investing pillars: alpha strategies and market cap-weighted indexing,” Elsaesser told Expert Investor.
Elsaesser said that in the past there was confusion as to whether factor investing active or passive, but professional investors have become more sophisticated. “Now it’s clear that factor investing is always active – even passively-managed smart beta strategies deviate from a benchmark,” he said.
The main reason investors use factor strategies – such as smart beta and active quant – is to increase returns, reduce risk and control portfolio exposure, according to Invesco’s latest study on factor investing.
Fixed income demand
Elsaesser added that there was increasing demand for smart beta and active quant fixed income strategies.
“Sophisticated investors and large institutional institutions increasingly want more bespoke solutions and they are starting to think about how these new factor strategies can complement their existing book of business,” he said.
“Smart beta was an entry point for equities and maybe we can take it from there in the fixed income space.”
Invesco’s study also found that 65% of wholesale and 48% of institutional investors felt that there was a gap in factor product coverage for fixed income, and some groups surveyed said they had sufficient teams and expertise in fixed income factors.
However, at other groups, fixed income factor strategies remain a work in progress.
“At the moment there is some research backing certain fixed income factors such as momentum and high yield, but we need to be a lot more careful when considering implementation of strategies in fixed income because of liquidity and trading costs,” a respondent in Invesco’s study said.