Middle East investors turn to 'factors' to offset market turmoil

Investors say the strategy is a better way to manage global economic uncertainty and diversify their portfolios, Invesco survey finds

A trader at the New York Stock Exchange. Investors are seeking safer strategies to hedge against this year's bear market. Reuters

Investors in the Middle East are increasingly turning to factor-based strategies in an effort to offset stock market volatility amid global economic uncertainty, high inflation and rising interest rates, according to a new survey by asset manager Invesco.

More than 50 per cent of respondents to the survey believe the current market environment makes factor investing in fixed income a better strategy to manage volatility and diversify their portfolios, Invesco said in the study, which polled 151 global institutional and retail factor practitioners managing more than a combined $25.4 trillion in assets.

“The use of factor strategies continues to rise as regional investors become more experienced and recognise the strength of an alternative approach in understanding the relative performance of their portfolios,” said Zainab Faisal Kufaishi, head of Middle East and Africa at Invesco.

Factor investing is a strategy in which securities are chosen based on either macroeconomic or style attributes that tend to offer favourable risk and return patterns over time, Invesco said.

Style factors typically include variables including lower-risk value stocks and financially healthy companies, while macroeconomic factors take into account the likes of economic growth, interest rate movements and political and sovereign risks.

Global economic uncertainty — compounded by the Russia-Ukraine war, supply chain crunch, rising inflation and higher interest rates — has increased volatility in financial markets in 2022, causing them to fall into bear territory and end the 13-year bull run.

Investors generally see fixed income returns as closely tied to fundamental macroeconomic variables, Invesco said.

Respondents to the study applied a systematic approach to their fixed income portfolios to prioritise traditional macro drivers of return, such as inflation and interest rates, before later incorporating investment factors such as value, it added.

However, 54 per cent of respondents said they use both macro and investment factors, and only 14 per cent target investment factors in isolation.

“Investors see factor investing as a flexible strategy that allows for both short-term tactical implementation during periods of market volatility, as well as an enhanced or index-plus approach for long-term strategic allocation against benchmark performance,” Ms Kufaishi said.

Persistent inflation and rising interest rates over the past 12 months have “dramatically impacted the investment environment”, leading to investors re-evaluating their portfolios, including factor exposures, Invesco said.

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Despite these challenges, 67 per cent of respondents to the survey said factor investing helped them to manage market volatility over the past year, while 64 per cent indicated their faith in factors grew over the previous 12 months.

Factor allocations are also rising, with 41 per cent of those polled saying they had increased allocations over the past year and 39 per cent are planning to increase them over the next 12 months, Invesco said.

Respondents to the survey also expect value, low volatility and quality to be the best performing factors over the next 12 months.

Meanwhile, more than 80 per cent of respondents believe their factor allocations have met or exceeded the performance of their fundamental active strategies and 64 per cent indicated their factor allocations met or exceeded performance compared to market-weighted strategies.

“The confidence in factor-based investment strategies has not only persisted in volatile times but grown stronger as their performance has recovered over the past 18 months,” said Georg Elsaesser, senior portfolio manager of quantitative strategies at Invesco.