(Bloomberg) – The quantum revolution in fixed income is finally here by the latest Invesco Ltd. survey.
With the home office era fueling an electronic commerce boom, the majority of investors in a $ 31 trillion community say they are now employing factor strategies in bond portfolios.
This is the latest evidence that systematic mass is going wild in a market that has long been viewed as hostile to their allocation methods. The strategies were put into practice by 55% of those surveyed, compared with 40% in the previous year.
In recent years, there has been a growing belief that dividing bonds by factors such as value and price momentum provides an opportunity to outperform traditional investment styles. After a decade-long debt rally drove yields to near zero, Wall Street is more receptive than ever to the pitch.
In the exchange-traded fund market, smart beta bond products – those that use factors to control exposure – grossed $ 13.5 billion this year, according to Bloomberg Intelligence. That’s already a record profit, with total assets up to $ 57 billion.
“The yield spread has been compressed, and if you look at the market information, it’s hard to understand what makes sense,” the Invesco survey quoted an unnamed North American institutional investor as saying. “Including factors in our retirement strategies has helped us find a way to navigate this time.”
The study, dated March, interviewed 241 institutional and large investors who were using factors in some way. It turned out that the most commonly used fixed income variants are Value, Quality, and Carry. Many asset managers also use macro styles such as duration, liquidity, and inflation.
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Further highlights are:
- In the equity world, Invesco noted that in line with market trends, the long-contested value strategy has regained popularity since economies began recovering from the pandemic late last year.
- 87% say they attribute the Factor – who likes stocks that are cheap relative to price fundamentals – compared to 82% last year. 42% have increased their style exposure over the past 12 months and 46% say they have kept it unchanged.
- 48% say they use factors to include environmental, social and governance concerns. Of these, 72% apply ESG screenings before using their factor model, while 57% include ESG variables in their models.
- 41% say that ESG is completely independent of investment factors, 29% say that it is indirectly integrated with other factors such as quality, while 30% say that it is a sole factor.
- In the year through March, 50% say factors performed in line with traditional active strategies, while 34% say they underperformed. When compared to market-weighted strategies, the answer was mixed: 38% said factors perform worse.
- Over the next 12 months, 57% plan to keep the factor allocations in their overall portfolios, 35% see increases and 8% see cuts.