Factor investing for fixed income is coming of age for money managers as they anticipate a rise in investors searching for new ways of eking out yield from challenging bond markets.
Executives at money management firms and consultants said they are becoming increasingly aware of the idea of bringing factors into fixed income — partly due to the market backdrop and also as they become more comfortable with the use of multifactor strategies for equities. But some said institutional investors are not quite up to speed, and sources said there are a number of important considerations for investors and managers, including the availability of data and how to apply multiple factors such as value and volatility to bonds.
"Although we have witnessed little demand for factor-based strategies from our client base, we have noted an uptick in asset managers promoting these products," said Paul Cavalier, global head of Mercer's fixed-income boutique in London. While the concept of factor investing for equities has been "embraced for several years," for fixed-income it is a different story.
"There are certain strategies that we have seen, we like, have rated and are putting in front of clients," said Kate Hollis, senior investment consultant at Willis Towers Watson in London. "But people are not knocking on the door saying 'give me multifactor fixed income' in the same way as (they are regarding) emerging markets debt, for example. ... It is complex, and the level of understanding and appreciation of how the strategies could and should be used is much lower."
If recent research by Invesco is anything to go by, client demand will be on the rise. The firm's latest Global Factor Investing Study showed that while 68% of those surveyed believe the theory of factor investing can be applied to fixed income, 32% make use of the strategy in their portfolios.
"Right now many of the institutional investors already comfortable with equity factor strategies are actively looking to allocate into fixed-income factors," said Jay Raol, Atlanta-based senior macro analyst at Invesco Fixed Interest. Interest is global, and the firm sees particularly high demand for credit factors in Europe, Middle East and Africa and duration or foreign exchange exposure in Asia.
Other managers agree. "Factor investing in fixed income is a more recent development than it is in equities, but the take-up has been more rapid," said Peter Walsh, London-based head of Robeco U.K. "The foundations had already been laid and for structural reasons, the implementation is more straightforward."