Asian investors have been increasing allocations to factors as performance has improved, and plan to continue doing so in the coming year, according to an analysis by Invesco.
Stephen Quance, global director for factor investing at Invesco in Singapore, told AsianInvestor that uptake for factor investing in the region has increased over the last year but remains significantly below that of North America and Europe.
Factor investing is broadly defined as a strategy for picking securities based on attributes associated with higher returns, such as macroeconomic indicators or a company’s size or industry.
“Adoption has been led by sovereign funds, with a small allocation by pension funds. Allocations by insurance companies and corporates are still largely absent,” he said, declining to give precise data regarding the scale of increase or to name individual investors. With the exception of China, where retail investors account for the majority of flows into factor strategies, retail interest in the approach is very low in Asia, he said.
Invesco published its 2022 global factor investing survey, now in its seventh year, at the end of September.
Quance pointed to several features that distinguishes Asian investors when it comes to factor investing.
The first is a long-established preference for dynamic or tactical allocations, which contrasts with longer-term, more strategic approaches by investors in Europe and North America.
“In Asia, this continues to be a distinguishing feature of investor allocations to factors,” he said, adding that over the long term such preferences could result in disappointing returns.
“One of the requirements for effective factor investing is to adopt a fairly long-term perspective. In general, investors in Asia are less likely to be looking [to invest] for ten years. They can be distracted and lose patience,” he said.
For advocates of factor investing within investor organisations, the long periods – often a decade or more – in which factors can underperform market cap strategies continue to be an impediment to those who might otherwise advocate for their adoption.
“There is always career risk. Nobody will survive at an organisation with [underperformance] for ten years; there’s very little chance you’ll still be around,” Quance said.
SHORT VS LONG TERM
However, he said that over the last three years – and particularly this past year – attitudes of global investors have shifted towards those of Asian investors, with a growing preference for dynamic, tactical implementation. Quance said that this shift coincides with the use of a shorter time frame over which the performance of factor strategies is assessed and that the effects were most striking for strategies that concentrated on single factors.
Those in Asia and beyond adopting multi-factor strategies tend to be longer term allocators, he said. “In these cases, they typically assess performance over a longer time period,” he said.
Stephen Gilmore, CIO of the New Zealand Superannuation Fund (NZ Super), which has used factor investing in external mandates since 2018, emphasised the importance of long-term allocations. He said that while factors have a track record of outperforming market cap strategies, this was true over a very long period of time which included substantial spells of underperformance.
“It could take a long time for performance of a given factor to revert,” he said.
One increasing trend identified by the Invesco survey among more sophisticated investors in Asia, is the growing use of factor investing to manage risk and monitor performance of an entire portfolio. In the Invesco survey, the proportion of respondents saying they followed this approach increased from 28% in 2021 to 55% in 2022.
Increasingly, investors are employing factor analysis at a portfolio level to ensure aggregate exposure tallies with their view on the factors, said Quance.
"We try to look through to see our exposure to risk premia on a broad portfolio level and we look to have positive tilts at the aggregate portfolio level,” said Kyle Schmidt, director of quantitative equity at the Teacher Retirement System of Texas (TRST).
The fund’s portfolio-wide weightings are achieved both through external managers and through allocations made by the internal team at TRST. Schmidt said that the latter focussed on the simpler, traditional risk-premia strategies, while external managers handled more complex, esoteric approaches.
However, Rishab Sethi, external investments manager at NZ Super said the fund’s use of factor benchmarks for this purpose was limited. “Factor benchmarks are a useful sense check. But we prefer the use of risk models and other portfolio decompositions or attributions to understand the sources of alpha in manager performance,” he explained.