Quants ready to conquer the world of bonds: Invesco

The quantitative revolution in fixed income is finally here, according to the latest survey from Invesco Ltd.

With the work-from-home era fueling an e-commerce boom, the majority of investors in a $ 31 trillion community say they are now deploying factor strategies in bond portfolios.

This is the latest proof that the systematic mob is rampaging in a market long considered hostile to their allocation methods. The strategies were put into practice by 55% of respondents compared to 40% last year.

The belief has grown in recent years that slicing bonds based on factors such as value and price dynamics offers a way to outperform traditional investing styles. After a decade-long debt rally drove returns to next to nothing, 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 guide exposure – have attracted $ 13.5 billion this year, according to data compiled by Bloomberg Intelligence. This is already a record that brought total assets to $ 57 billion.

“The yield spread has been compressed, and when looking at the market information, it is difficult to understand what is significant,” said an anonymous North American institutional investor, according to the Invesco survey. “Incorporating factors into our fixed income strategies helped us find a way through this time. “

The study, dated March, surveyed 241 institutional and wholesale investors who use factors in one way or another. He found that the most commonly used fixed income varieties include value, quality, and carry. Many fund managers also use macro styles such as duration, liquidity, and inflation.

Other highlights include:

  • In the equity world, Invesco has found that the long-standing value strategy has regained favor, in line with market trends since economies began to recover from the pandemic late last year.
  • 87% say they allocate to factor – who likes cheap stocks over price fundamentals – up from 82% last year. 42% have increased their exposure to the investment style in the past 12 months and 46% say they have kept it unchanged.
  • 48% say they use factors to help integrate environmental, social and governance concerns. Among them, 72% apply ESG filters before using their factor model while 57% include ESG variables in their models.
  • 41% say ESG is completely independent of investment factors, 29% say it is indirectly integrated with other factors like quality while 30% say it is a factor in itself .
  • In the year to March, 50% said letter carriers worked according to traditional active strategies, while 34% said they underperformed. Compared to market-weighted strategies, the response has been mixed, with 38% saying the factors made it worse.
  • Over the next 12 months, 57% say they plan to maintain factor allocations across their portfolios, 35% see increases and 8% see reductions.

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