Global Study: The Next Five Years Will See Dramatic Increase of Factor Strategy Usage Among Institutional Investors

"Global trends in factor investing are resonating across the U.S. as well, with investors seeking efficient vehicles for yield and risk protection, driving flows into smart beta fixed income strategies and low volatility ETFs," said Dan Draper, Invesco's Global Head of PowerShares.

Institutions prefer internal control of strategies, but with hands-on support from asset managers

Despite a strong preference for internal control over factor models [figure 3], a lack of internal capabilities was cited as the greatest adoption barrier with a rating of 8.3 out of 10 [figure 4].

While institutions want to control their factor investments, they explicitly requested support from the wider asset management industry, citing training support and consulting advice as the two most effective industry propositions to address their concerns [figure 5].

"There is clearly a call for the asset management industry to show a greater understanding of how investors want to manage and assess factors in their portfolios, and how asset managers can help with this," said Langer. As investors and their investment service providers become more comfortable with factor capabilities, we expect greater separation between assessing and managing factors to emerge as investors realize they can retain control while outsourcing the strategy execution."

Many investors explained that consultants should be well positioned to be the natural partner—with practical application expertise—for an institution looking to develop a strategic factor-based approach, referencing their experience supporting institutions with asset liability models as an example.

According to the study, only 9% of respondents cited academic institutions as best placed to assess the role of factors within their portfolio [figure 3]. This is ultimately where asset managers can play an extended partnership role with institutional investors, bringing hands-on support and global capital markets teams to assist with trade execution and liquidity services as required.

Private banks specifically stated that the greater use of ETFs, indexing, smart beta and active quantitative products alongside fundamental active management are driving greater cost efficiencies.

"Factor strategies are opening new doors to portfolio diversification, and we've found that—along with growing investor adoption—there is increasing demand for fund providers to demonstrate their holistic understanding of clients' needs beyond product selection to also recommend practical insights for portfolio implementation," said Draper.

For more information on PowerShares Factor Investing, please visit: https://www.invesco.com/portal/site/us/financial-professional/etfs/strategies/factor-investing/.

Notes to editors

*Sample & methodology - The fieldwork for this study was conducted by NMG's strategy consulting practice. Invesco chose to engage a specialist independent firm to ensure high quality objective results. NMG conducted in-depth (typically 1 hour) face-to-face interviews with key decision makers within 66 different asset consultants (AC), insurers (INS), pension funds (PEN), sovereign wealth funds (SWF) and private banks (PB) globally.

Figure 1

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Figure 2

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Figure 3

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Figure 4

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Figure 5

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Figure 6

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SOURCE Invesco Ltd.