Institutions flock to factor investing

Pie charts dataInstitutional investors are increasingly conscious of the value of using factor-based strategies in their investment processes, a new study has revealed.

Published by The Economist Intelligence Unit and sponsored by iShares’ parent BlackRock, the findings suggest institutions believe factors can help deliver long-term outperformance, decrease portfolio risk, increase transparency in portfolio construction, and better understand past and future drivers of return.

Factor investing theorises that risks and returns of all investments, no matter how nominally diverse, can be mapped to a common set of underlying factors, such as economic growth, inflation and interest rates, and style factors including momentum, quality, value and volatility.

The study surveyed the opinions of over 200 global organisations, which collectively manage assets of $5.5 trillion (€4.8 trillion). It found factor use is widespread and on the rise, with over 85% of respondents utilising factors in some part of the investment process.

Close to two-thirds of institutions surveyed had increased their usage of factors over the past three years. The trend is expected to continue, as 60% of respondents indicate they plan to increase their use of factors over the next three years. The desire to improve returns is the most important motivation for increasing factor use.

Andy Tunningley, head of strategic clients in BlackRock’s UK institutional wing, attributes growing interest in factor strategies to the unexpected correlations of asset performance during the financial crisis, which motivated investors to better understand underlying risks.

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