Stephen Quance, Invesco
There is an availability problem in the region for the time being, especially for retail investors. For example, factor-based strategies exist in “small pockets” in Asia, such as in Hong Kong’s Mandatory Provident Fund (MPF) platform.
“We have a long way to go before we get to a point where they are broadly available to mass audiences,” Quance told FSA.
He explained that although his firm has the capabilities to manage various multi-factor or single-factor strategies, with $116bn in AUM in factor-related strategies and at least 100 investment professionals globally, he does not see much demand yet for such products within the mass retail segment.
“If you are not familiar with it, or if you don’t have the background to understand it, then you are likely not to select it anyway, and getting a large number of factor strategies on accessible platforms has a cost and expense.
“How can you make a pig sexy? It’s hard to make a pig sexy."
“This is why one of the big reasons why I am spending so much time in educating investors, [including institutions and distributors], about factor-based strategies.”
Of Invesco’s factor-related AUM, only a small portion comes from Asia, the majority of which comes from large government-related institutional investors in segregated accounts or customised mandates, Quance said. Other clients also include some family offices in the region, he noted.
Not a “sexy” idea
Quance acknowledged that educating Asia-based investors about factor investing is difficult.
The high net worth segment is also not exempt from this challenge. “There’s definitely interest [from private banks] and they want to stay abreast. But for the most part, I sense they are not quite ready for it yet.”
Quance added that he doesn’t think the idea of factor-based investing is “really sexy”.
“How can you make a pig sexy? You can’t tell a story about it that gets people really excited, so that makes it difficult. Even if you are a very smart high net worth person, it doesn’t mean that you necessarily have interest in becoming an expert in the mechanisms of how factor investing works. And without that kind of foundation, it’s difficult to evaluate in the right perspective of [how a factor strategy] should work for you,” he explained.
Nicolas Faller, co-CEO for asset management at Union Bancaire Privée, also shares the same sentiment. “I am not convinced by the idea of smart beta products going mainstream for retail or private clients,” he told FSA previously.
He said the major obstacle for such products to be widely accepted is the complexity of the investment process and the underlying algorithmic principles.
“Smart-beta products are not always easy to understand by advisers and private bankers. If it’s not well understood by the professionals, it’s as difficult to explain to their retail and private clients,” Faller added.
For Quance, meanwhile, what he said has worked with institutions, is first educating them on how investors in other parts of the world are using factor-based investing. He said he explains the academic research behind it, how it has evolved over the years and the rationale for adopting such strategies.
Institutions to lead the way
Given time, he said he believes that factor-based investing will become more commonly used in Asia.
“It’s only a matter of time before it starts to really move into the mainstream, and one thing we know about Asia is things can happen fast,” he added.
“Similar to other technologies, we are still early adopters in Asia-Pacific, but it only is a matter of time before we get into mass adoption.”
The largest institutional investors will lead the way, predicted Quance.
“It is the largest, most sophisticated investors that are doing this, and they are saying ‘this is working for us and we’re going to do more of it’,” he said.
He added that some institutions in the region have started to explore other ways of adopting factor-based strategies. For example, those that have started with factor-based investing in equities a few years ago are now interested in applying such strategies to fixed income.
Quance also noted that institutions in the region are making use of factor-based strategies as part of their strategic portfolios.
“They are taking very long-term structural positions in the factors in order to produce a particular outcome. But there are also [tactical] uses. You can use a single factor-type strategy if you have a view of how markets are going to behave, and you can position your portfolio across a particular set of factors to express that view.”
There is also some evidence that private banks in the region are starting to adopt factor-based or smart beta strategies.
For example, private bank investment in iShares smart beta products increased by five times since the beginning of 2017, Ben Garland, Blackrock’s Hong Kong-based head of factor investing for Asia-Pacific, told FSA previously.
As of the end of March, Blackrock managed $700m in smart beta products on behalf of private banks in the region, compared with $135m at the beginning of 2017. Total net inflows from 2017 was $400m, while 2018 inflows ending March was at $110m, he said.