Quantitative Methods

Factor Investing - institutions continue to increase allocations

Invesco Global Factor Investing Study 2017 reveals state of the marketplace

This year's Invesco Global Factor Investing Study reveals that growth in the sector remains strong. Large investors are increasingly integrating a factor approach into their wider processes, while smaller institutional investors are more reliant on external partners for implementation. Factor Investing providers are well-positioned -  offering products based on evidence-based research and pitched at a reasonable price point.

Below we list some of the best factor investing papers that we've come across in the last couple of months, including a paper on time-varying factor exposures from the Financial Analysts Journal.

street food factor investing Invesco white papers

Invesco Global Factor Investing Study 2017
(For compliance reasons, this paper is only accessible in certain geographies)
Invesco's 2017 factor investing study offers important insights into the growth of factor investing around the world. The report authors conducted over 100 interviews with institutional investors to gauge key themes to emerge this year.

Estimating Time-Varying Factor Exposures (Financial Analysts Journal, 2017)
The authors of this report develop a methodology to estimate dynamic factor loadings using cross-sectional risk characteristics. Applying it to a dataset of US-domiciled mutual funds, they distinguish the components of active returns.

SSGA Long Term Smart Beta Forecasts, Sept 2017
SSGA derives forecasts for the excess returns from the major equity risk factors (value, quality, size and low vol) over 3 year and 10+ year time horizons.

Sustainable Factor Investing (Invesco, 2017)
(For compliance reasons, this paper is only accessible in certain geographies)
This Invesco paper investigates histories of factors and ESG respectively, exploring how their stories have more recently become entwined, as both has risen in prominence in recent years.

Factor Investing: Lucky Factors (Harvey & Liu, June 2017)
In this paper by Harvey and Liu, they propose a new method to select amongst a large group of candidate factors -- many of which might arise as a result of data mining -- that purport to explain the cross-section of expected returns.

Active Strategies, Indexing and the Rise of ETFs (BlackRock, Oct 2017)
(For compliance reasons, this paper is only accessible in the US)
Institutional flows into ETFs are expected to grow to $300B annually by 2020. This paper presents the results of the industry's most comprehensive study to date of the global institutional market for exchange-traded funds.

Invesco Factor Investing Insights: Introduction and Research, 2017
(For compliance reasons, this paper is only accessible in certain geographies)
Factor-based investing has increased meaningfully in recent years. This booklet consists of a series of papers written by several Invesco experts on factor investing approaches.

The Promises and Pitfalls of Factor Timing (Jacobs Levy Center, 2017)
This paper revisits the promises of factor timing, documenting the historical linkages between equity factor performance and different groupings of predictors—Sentiment, Valuation, Trend, Economic Conditions, and Financial Conditions.

In Factor Investing, Little Things Mean a Lot (Cliff Asness, Sept 2017)
In this brief paper, Cliff Asness of AQR Capital Management discusses factor investing fees and, what he calls, the tyranny of small decisions.

The Six Sins of Smart Beta (Lazard, 2017)
This paper by Lazard Asset Management focuses on six specific risks that could undermine a smart-beta strategy and detail the environments in which particular smart-beta strategies are more likely to underperform.

Value: A Practitioner's Guide (S&P Dow Jones Indices)
How someone measures the relative “cheapness” and determines how much of a portfolio to put in a “cheap” stock are key items to consider when looking at value. This paper acts as a helpful guide to value investing for investors.

Fixed-Income Portfolio Optimization (Axioma, 2017)
By using a risk model to analyze a portfolio, managers gain insight into risk and exposures. This paper by Axioma explores fixed-income portfolio optimization further.

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