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Investors are increasingly including index funds as part of their investment portfolios due to cost considerations and the diversification benefits they can offer alongside more traditional strategies.
However, index funds will only ever perform in line with their index, and we believe that by adding investment skill to index investing, there is an opportunity to grow returns.
What is factor investing?
In its most basic form, factor investing is just investing in a group of stocks with similar characteristics, such as low volatility or high dividend yields.
However, these single, bottom-up criteria are often combined to build aggregate factors such as Value, Momentum, Quality and Growth.
An interesting implication of factor investing approaches is that they do not usually build on fund managers’ discretionary stock picking skills, but on the evidence that exposures to certain factors can result in outperformance in the long run.
Using multiple factors
At Invesco Perpetual, our factor investing goes far beyond this single factor approach. We implement strategies with well-diversified exposures to multiple factors with different cyclical characteristics, thereby offering the opportunity for a more stable return profile.
More importantly, our factor investing approaches focus on bottom-up stock selection we incorporate explicit alpha (and risk) expectations to construct multi-factor portfolios within the scope of extensive risk management.
Balancing index-like performance and index outperformance
To many, the beauty of being passive is the idea to generate index-like performance without bearing any excessive drawdown risks relative to a benchmark.
However, the caveat of being passive is that after costs, the index return is never fully captured, which can lead to meaningful compounded underperformance over time.
At the same time, investors’ search for yield is becoming ever more difficult, so each additional basis point of extra return generated from equity exposures is important.
This is why multi-factor equity strategies are gaining interest from investors: they offer access to moderate extra return potential without them having to go too far from their comfort zone.
These strategies maintain some characteristics very similar to passive strategies, but also offer an explicit outperformance expectation over the benchmark.
Careful implementation of moderate active positions versus the benchmark (i.e. building up active money) in a risk-controlled framework, in order to generate positive alpha expectations, is the added value the Invesco Perpetual enhanced index fund range managed by Invesco Quantitative Strategies (IQS) team can offer.
Factor evolution
With over 30 years’ experience in this field, we know that nothing is as constant as change. Factor development responds to opportunity and threat. It deals with weaknesses and strengths.
When we look at the opportunities, we constantly see new ideas bubbling up and an incessant stream of new datasets becoming available.
However, life and markets are not only about opportunities. There are threats too. Other market participants pursuing similar ideas in a number of ways make markets more efficient, so our factors need to subtly evolve to stay ahead of the market.
