Investors expect factor strategies to outperform in an inflationary environment with slow economic growth, according to a recent study from Invesco.

Mo Haghbin, Chief Commercial Officer and COO, Invesco Investment Solutions.

The 2022 Invesco Global Factor Investing Study polled 151 institutional and wholesale investors who are already investing in factor strategies and collectively responsible for over $25.4 trillion in assets.

Amid a turbulent environment of spiking inflation and rising interest rates, the research found that investors have ramped up their factor exposures with 41% of respondents growing their allocations over the past year and 39% planning an increase in the next 12 months. Only 3% of respondents indicated they planned to decrease their factor allocations over the next 12 months.

The main motivation for utilizing factor strategies was risk and performance management, cited by more than half (55%) of investors, a notable increase from the 28% of respondents that signaled this purpose four years ago.

Mo Haghbin, Chief Commercial Officer and COO, Invesco Investment Solutions, said: “Our clients are increasingly using factor strategies to control exposure to different sources of risk in a challenging and volatile market. It’s not surprising that demand has increased, and we believe investors are going to remain committed to factors in the long term.”

According to the study, investors are overwhelmingly satisfied with the performance of their factor allocations with 80% of respondents stating it has met or exceeded the performance of their fundamental active strategies, while two-thirds (64%) indicated it has met or exceeded the performance of market-weighted strategies.

Last year’s study found that the adoption of a long-term, diversified, multi-factor approach is now the norm for factor implementation. This trend has only strengthened with the increase in global market volatility – four-fifths (80%) of respondents stated that they adjust their factor weights over time according to the economic cycle and to balance out exposures across their portfolios.

“Investors are shifting their philosophy from static allocations to more dynamic approaches to capture upside and position their portfolio across the economic cycle,” added Haghbin.

Within fixed income, factor strategies are moving into the mainstream as investors seek out new sources of return and attempt to navigate the changing landscape as the 40-year bond bull run comes to a halt. A vast majority (92%) of respondents now believe factor investing can be successfully applied within fixed income, a significant increase from less than two-thirds (61%) of investors who were supportive of the approach in 2016.

Factor strategies are currently being deployed most widely within government bonds (cited by 76% of respondents) and corporate bonds (75%), reflecting both the depth and liquidity of these markets as well as the number of products available. Over the next five years, investors anticipate that factor investing will spread to other fixed income asset classes, notably high yield where 71% of respondents believe they will deploy a factor approach.

Haghbin added: “Adoption of factor investing in fixed income continues to grow as we shift to a rising interest rate environment, which presents challenges to the long-held orthodoxy of balanced, diversified portfolios. As we enter a period of tightening monetary policy, higher inflation, and slower potential economic growth, clients are looking to expand the toolkit and find opportunities to generate income while managing interest rate risk with better precision.”