Factor investing for institutional investors

Worldwide, more than 500 billion US-Dollar are invested in factor strategies. To investigate the motives behind the high inflows of 51 billion US-Dollar, Invesco has surveyed pension funds, insurance companies, public investors, financial advisors and private banks. On average, those want to double their allocation to factor strategies within the next five years.

The most important reason for investing in factor strategies is risk reduction. Especially defensive investors are using quantitative multi-factor strategies, internal factor products for bonds and liquid alternatives, say fundresearch.de. The second most important reason to engage in factor strategies is generating additional returns. 83 percent of surveyed investors state that factor strategies can contribute an important part to alpha generation. Besides risk reduction and return enhancement, diversification, cost advantages, index substitution and benchmarks play a role for the selection of factor products.

While many investors are generally interested in factor strategies, none of them shows a particular interest in standardised products. Instead, strategic factor models and holistic multi-factor approaches are preferred by institutional investors. Bernhard Langer, Co-Chairmen of the Factor Investing Council and CIO of Invesco Quantitative Strategies, illustrates that institutional investors have very different demands that are to be solved with tailored factor-based products.

Using factor investing, investors want to maintain control over their engagement. 61 percent see their organisation as best suited to assess the role of factor investing in their overall strategy. Moreover, 71 percent believe to best suited to control their engagement in factor strategies. To compensate for a lack of competencies, training support and consulting from asset managers are used by institutional investors.