Demand for factor-based strategies is increasing among private banks, global pension funds, insurers, sovereign wealth funds, and asset consultants in Europe, North America and Asia Pacific, according to a study by Invesco.
Seventy percent of the respondents said that they already use factors in portfolio construction, while 71% of respondents said that they plan to raise factor product allocations over the next five years.
Risk diversification and increasing alpha have been cited as the main drivers for increasing factor allocations by respondents.
Findings from the study also revealed a strong preference for internal control over factor models among respondents, with 61% holding the view that their organisations are best placed to assess the role of factors and 71% agreeing that they are best placed to manage factors internally.
When asked about the main impediment to factor adoption, majority cited the lack of internal capability as the greatest barrier.
At the same time, respondents also requested support from the wider asset management industry, stating training support (37%) and consulting advice (24%) as the most effective industry propositions to address factor concerns.
In particular, private banks said that they want asset managers to build up tailored factor for varied implementations and more client friendly marketing materials.
Also, 83% of respondents held the view that factors help explain outperformance, with different investors having different needs.
Sovereign investors in Asia were found to be the fastest adopters of internal risk factor models, while German insurers were found to be migrating from fundamental investments to smart beta ETFs and equity factor models to boost risk adjusted returns
Meanwhile, post RDR, charge caps on default funds and stakeholder engagement were found to have supported growth in smart beta products in the UK.
According to the study, investors’ had less focus on off-the-shelf factor products and more focus on strategic factor models and a more holistic multi-factor approach.
Invesco co-chair factor investing council and CIO of quantitative strategies Bernhard Langer said: “Our research confirms that both popularity and desire for even greater adoption of factor investing is growing.
“But given the diverse nature of investors, the asset management industry needs to consciously address their clients’ needs for a tailored and consultative approach towards the implementation of factor-based strategies.”