Factor investing has been around for more than half a century, but for the majority of that time has been driven by academic research. There haven’t been many investors using factor-based strategies in practice yet, but new research hints that we’re hitting a boiling point where that is starting to change.
Invesco, a leading asset manager that has more than 30 years of experience in factor investing, recently published its third annual Global Factor Investing Study. To compile this report, the firm took a deep-dive through more than 300 interviews with institutional and wholesale investors.
Industry-wide, Invesco estimates that about half of institutional investors have taken up a factor strategy, and data from its research sheds light on the speed of that adoption. There seems to have been a tipping point in 2015, the year that half of respondents said they began adopting factor investing. That’s shows a significant jump from the 15 percent of respondents who said they used factor-based strategies prior to 2010, and just over 30 percent who started between 2010 and 2014.
While the trend curve of adoption is starting to shoot upwards like a hockey stick, data suggests that most firms are still in an exploratory phase. Of the 300 investors surveyed, 80 percent said that factor strategies represent less than 20 percent of equity and fixed income allocations.
However, this is just the beginning. Adoption of factor investing is spreading among firms, and once they start incorporating factor-based strategies, the propensity to incorporate them into overall investment goals increases, according to the study.
So what’s holding firms back from getting started?
According to the report, “the most significant barrier is (and has always been) internal capability. This is in itself important because it demonstrates that investors see factor investing as a distinct competency requiring specific rather than generalist expertise from elsewhere in the internal team.”
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