Volatility Fears Push Investors Into Factor Strategies

Allocations to smart beta and active factor-investing strategies grew in 2017 as investors sought to diversify and manage volatility.


Appetite for low-volatility and value strategies led institutional investors to hike allocations to factor-driven investments in 2017, according to a new poll.

Invesco’s global factor investing study found that allocations to smart beta and active factor strategies across Europe, North America, and Asia made up 17 percent of institutional portfolios in 2017, up from 15 percent in 2016. The survey included responses from 108 investors and intermediaries across 19 countries, accounting for assets in excess of $7 trillion.

In Europe and in North America, the number one reason for allocating to factor products was to reduce portfolio risk, whereas in Asia, the overwhelming reason was to increase alpha.

European investors are increasing allocations to both smart beta and active factor strategies, according to the research, at the expense of fundamental passive equity strategies and fixed income allocations.

Felix Goltz, head of applied research at the EDHEC Risk Institute, said it is time that the industry develops frameworks to evaluate these factor-based strategies.


“There is a whole load of research that goes into assessing active strategies,” he said. “The industry has to make the effort to develop some frameworks for evaluating these strategies. You have the traditional business consultants to help with manager selection but who is helping with factor selection?”

Of those investors choosing not to invest by factor, the survey found that the number one reason was a lack of belief in the theory of factor-based investing or a lack of in-house expertise.

Still, central bank policies have kept interest rates low and investors have been keen to seek new ways to diversify portfolios, according to Georg Elsaesser, senior portfolio manager for quantitative strategies at Invesco.

“This may drive demand for fixed-income factor strategies to reduce risk and improve diversification and performance,” he said. “In addition to fixed-income strategies, investors are showing an appetite for the expansion of factor investing into multi-asset as well, highlighting the opportunity for product development.”

In 2017, 26 percent of those that were invested in factors globally allocated to low-volatility strategies and value-investing products. Allocations to high-yield, momentum, quality, and low-size factor strategies were all down year-on-year.

Laurent Trottier, global head of exchange-traded funds, indexing, and smart beta portfolio management at Amundi, said investors have moved from single factors to a multi-factor approach.

“They are looking at the existing factor exposure from aggregated positions and using a factor ETF to complement the existing position, or to tactically overweight the factor through a more strategic allocation,” he said. “At the other end, you have investors looking for aggregated solutions from a pure performance point of view, looking at multi-factor solutions.”