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.
“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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At Morningstar: Using Factors in Fixed Income Investing Remains Difficult
Tags: Bear Market, factors, Fixed-Income, Invesco, market cap weighted, S&P 500, Stock Market