The quants are expanding their toolkit beyond factor investing: Invesco

Systematic investment specialists, or those that employ quantitative analysis in their investment strategy, are using a broader base of methods than previously according to independent investment management firm Invesco, with a combination of new technology and alternative drivers pushing ‘quant’ teams in whole new directions.

Research out of Invesco’s Global Systematic Investing Study 2023, which was based on interviews with 130 systematic investors (defined as investors that employ structured, rules-based quantitative models and algorithms to make investment decisions), revealed four key themes that all shared a link to technology.

The foremost takeaway from the study, Invesco says, is that systematic investors are going beyond the traditional factor investing methods used to gain an edge in the hunt for yield. “While factor investing remains a key pillar, its role is examined within a maturing universe of systematic strategies,” said Invesco senior portfolio manager Andre Roberts.

Instead of overweighting specific factors such as value or momentum as the base strategy, investment teams are “broadening their toolkit and using more diverse strategies”, the report states. Some of these methods are already established but experiencing greater adoption; dynamic asset allocation, multi-asset analytics and the use of derivatives/options among them. Others, such as quantitative ESG models and machine learning/AI, are being employed by many teams for the first time. “Systemic investing now encompasses a broader range of quantitative methodologies,” said one North American investor in the global study.

According to another investor, recent volatility and the prevalence of market shocks (the pandemic, the war in Ukraine etc.,) have reinforced the need to have an extended and more current list of tools. “In the voyage of long-term investment strategy, when unexpected obstacles appear, should we stay on the same course or try to skillfully steer around them?” they said. “That is the question big investment players face today.”

The second key theme identified by Invesco is that factor exposure duration is changing to accommodate the extraordinary success of growth stocks, in particular technology companies, in the last few decades. Invesco calls this a “notable shift” in systematic portfolio construction.

“Investors are increasingly diversifying factor exposures over time, adjusting for macroeconomic forecasts and desired portfolio balances,” the report states. “The study reveals a growing acceptance of ‘growth’ as a bona fide investment factor, challenging traditional views.”

The third and fourth themes identified by Invesco are marks of our time; meeting environmental, social and governance (ESG) benchmarks and using artificial intelligence (AI) to generate alpha.

“Investors believe AI will be transformational in the next decade, citing advantages for risk management, efficiency, and alpha generation but with challenges to be overcome, including complexity and cost,” the report states, noting that AI will also aid in meeting the ESG challenge.

“Looking ahead, AI is expected to increasingly play a central role, with 50 per cent (of respondents) expecting to use it for ESG integration, a significant leap from 17 per cent (in 2022). AI helps in developing proprietary ESG metrics and expand integration across new asset classes.”