Pension funds, insurers, sovereign wealth funds and other investors plan to almost double allocations to factor-based strategies over the next five years.
A study by Invesco found 71% of institutional investors, private banks and consultants across the globe expect to increase their allocations.
Seventy percent of respondents already use factors in their portfolio construction, primarily for risk reduction. Of those not using these strategies, half are considering it.
Invesco expects growth in multifactor quantitative strategies, internal factor models and fixed-income and liquid alternative strategies, as they continue to seek alternative sources of returns.
Almost two-thirds, 61%, of respondents said their organizations are best placed to assess the role of factors in their portfolios, and 71% said they were best placed to manage factors internally.
“It looks like (investors) feel they have greater control over their investments — if I buy a value or growth ETF, I get what I want,” said Bernhard Langer, co-chairman of the Factor Investing Council and chief investment officer of quantitative strategies at Invesco, in a telephone interview. Mr. Langer said that is not necessarily good for the money managers, since “clients do have a preference for managing (these strategies) themselves.”
However, the biggest barrier to entry for those not yet using factor strategies is that investors do not think they have in-house expertise. “This is counterintuitive. They say they want to do it internally as they have better control,” but they say they don’t do it because “they don’t feel they have” the internal capability.
There is a role for money managers to play, doing a better job and helping investors to understand how to overcome this barrier. “It is really training, training, training — not selling a product. Training on a conceptual level,” Mr. Langer said.