Factors Grow in Popularity Among Investors, Study Says

Factor investing is getting new love among investors in this time of high inflation, escalating interest rates, wild volatility and crashing security prices, according to a survey by asset manager Invesco.

Adopting factors to construct more resilient portfolios is happening for both stocks and bonds, which have been hammered this year, noted the survey. The report was based on interviews with 151 institutional and other kinds of professional investors. Factor allocations are on the rise, the report finds, with 41% of respondents increasing allocations over the past year and 39% planning to do so in 2023.

The study doesn’t document that factor investing has delivered uniformly better results, but shows that the respondents think it will in a time of inflation and slow economic growth. In addition, just over half those surveyed think factors will deliver better outcomes for fixed-income assets.

Respondents who use factors reported mixed results in the 12 months through last March, when the bear market had begun, per the study: 41% said factors outperformed but 36% said they underperformed, with the remainder saying it made no difference.

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“Investors are shifting their philosophy from static allocations to more dynamic approaches to capture upside and position their portfolio across the economic cycle,” said Mo Haghbin, chief commercial officer and chief operating officer at Invesco Investment Solutions, in a statement.

What’s more, he added, “Adoption of factor investing in fixed income continues to grow as we shift to a rising-interest-rate environment, which presents challenges to the long-held orthodoxy of balanced, diversified portfolios.”

Believers in the factor approach cast it as a superior way to pick a winning allocation, usually by creating their own indexes—because factors aren’t based on the traditional ways of measuring securities, market capitalization. The market cap method, factor followers argue, often ends up overweighting in popular stocks, such as the big tech names (popular up until this year, that is).

Instead, employing screens from a range of different metrics is a better idea, factor fans contend, a range of methods that include value, momentum, quality, low volatility, small cap and dividend yields. During the bull market that ended this year, those techniques usually lagged behind the cap-weighted S&P 500.

In the survey, respondents favored three factors the most, with 68% using value, 58% quality and 53% low volatility. Most often, they didn’t focus on just one style, but preferred to use several to screen potential portfolio additions.

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Tags: Bear Market, factors, Fixed-Income, Invesco, market cap weighted, S&P 500, Stock Market

BNY Mellon’s new multi-asset digital custody and administration platform has finally gone live in the U.S., with some clients now able to hold and transfer Bitcoin and ether.

In February 2021, BNY Mellon established an enterprise digital assets unit to develop digital asset technology services, and to secure infrastructure for transferring, safekeeping, and issuing digital assets. At the time, the company said it was expecting to begin offering the services before the end of last year.

The digital asset team is led by Mike Demissie, BNY Mellon’s head of Advanced Solutions.

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BNY Mellon said it is working with digital asset technology specialists Fireblocks and Chainalysis to integrate their technologies into the digital custody and administration platform. Chainalysis’ KYT software suite is intended to detect patterns of high-risk activity with continuous, real-time transaction monitoring for all cryptocurrency assets.

The bank said that a recent survey it sponsored indicates strong demand among institutional investors for a financial infrastructure to handle both traditional and digital assets. According to the survey, 91% of institutional investors polled said they are interested in investing in tokenized products. BNY Mellon also said that 41% of institutional investors surveyed already hold cryptocurrency in their portfolios, while another 15% said they plan to hold digital assets in their portfolios within the next two to five years.

BNY Mellon is one of several banks that have either launched or have announced plans to launch digital asset units and digital asset custody platforms in the past year or so. In June 2021, Citigroup launched a digital asset unit, and this past June, the bank hired Swiss blockchain and cryptocurrency specialist firm METACO to develop and pilot digital asset custody capabilities.

State Street launched its State Street Digital about the same time as Citigroup, saying it will expand to include crypto, central bank digital currency, blockchain, and tokenization. And this past March, the digital division signed a licensing deal with Copper.co, a U.K.-based institutional digital asset custody and trading infrastructure provider. State Street Digital said it plans to use Copper.co’s technology to develop and launch an institutional-grade digital custody offering.