When will factor-based strategies take off in Asia?

Data

Few private banking end-investors in the region are asking about factor investing, according to Invesco.

Demand for factor-based strategies in Asia is still largely driven by institutions, according to Stephen Quance, Singapore-based director for factor-based investing at Invesco.

“In Asia in particular, mainstream retail investors are largely not there yet when considering factor-based investing. Similarly, for private banking clients, it is still early days,” he told FSA.

Citing a recent survey that the firm conducted, Quance said that client interest remains low in the region among wholesale players, which include retail and private banks. Nearly 70% also indicated that the complexity of the theory is one of the main obstacles to adopting factor investing.

Source: Invesco

“Distributors are also not getting flooded with questions from end-investors about factor investing, so it’s really not in the mainstream yet,” he added.

Source: Invesco

Nicolas Faller, co-CEO of asset management at Union Bancaire Privée, also doubts that factor-based strategies will become popular among Asian investors soon, citing the complexity of the investment process and the underlying algorithmic principles as major obstacles.

Given that the demand in Asia-Pacific is largely institutional, Invesco has not yet launched SFC- or MAS-authorised factor strategies for mass distribution. At the moment, it only manages separate account mandates for institutions in the region, according to Quance.

Nevertheless, Quance believes that more Asian investors will eventually start allocating to factor-based strategies. According to the survey, around 55% of institutions and distributors in the region plan to allocate more into factor-based strategies in the next three years.

“Although it is not in the mainstream yet, this may reach a tipping point and investors may start to move in quickly.”

Although the firm’s efforts to promote factor-based strategies are focused on institutions in the region, distributors are now being included in their discussions.

“We are having ongoing conversations with distributors that interact more with end-investors.

“We will bring these strategies to mainstream distribution as soon as we see [more interest from end-investors]. Whether that will happen in the next year or two, I really don’t know, but we know things can happen very quickly in Asia,” he said.

Separately, assets of Invesco’s factor-based strategies have grown to $120bn as of the end of September from $116bn in December, according to Quance, but did not give a regional breakdown. Quance noted that the increase in assets is a mix of capital appreciation and organic net inflows from investors.

Risk management function

For the Asia-Pacific wholesale market, reducing risk is the primary reason for using factor-based strategies, according to Invesco’s survey.

Source: Invesco.

“An exposure to a particular factor helps explain the drivers of returns. There have been particular factors that have tended to do well in particular stages in the economic cycle, and investors can use that information to enable some changes in their portfolios to control risk.”

For example, the value factor has underperformed in the past three years as growth stocks have come into favour among investors, according to Quance.

As a result, investors globally that use factor-based strategies have reduced their exposure to value while increasing allocations to quality and low volatility factors.

“We’ve seen an increase in quality and momentum as they are more defensive factors than value,” he said.

Source: Invesco. Note: global figures.

Indeed, in the past year, low volatility and quality stocks both globally and in the US have outperformed their respective broader indices, according to the report.

Source: Invesco

The firm is also seeing increasing demand for fixed income factor-based strategies.

“Globally, there is a big pick up in the number of respondents that express the belief that the factor approach can be applied to fixed income.”

In Asia, a number of investors who adopted factor-based investing in equities a few years ago are now interested in applying such strategies to fixed income, he added.

Source: Invesco. Note: global figures.

Without giving any figures, Quance said that the firm already manages fixed income factor-based strategies, but they account for only a small portion of the firm’s business.

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