401k providers should look to factor-based products to meet investor demand and deliver a wider range of investment solutions.
Reducing risk and increasing alpha are the top two reasons investors use factor-based products, which are (obviously) important for successful 401k participant outcomes, according to Invesco. As long-term investors focused on fundamentals, it would therefore fit well with the needs of many 401(k) plans.
A new study from the firm predicts that demand and adoption of the strategies, which look to specific company “factors” to gauge outperformance, will continue on an upward trend.
Specifically, the study found that demand is likely to surge in the next five years, with 71 percent of respondents expecting to increase allocations. Over two thirds of respondents (70 percent) already use factors in portfolio construction, with risk reduction as the primary driver, followed by increased alpha, a measure of risk-adjusted performance, and half of non-user respondents are considering factor capabilities.
Many respondents explained that they had made small allocations as part of an initial trial period, but plan to increase these allocations.
Growth is expected particularly in multi-factor quantitative strategies, internal factor models and fixed income and liquid alternative products, as investors continue to seek alternative sources of returns in a sustained low-yield environment of low interest rates and stock market volatility.
There is strong belief in the rationale behind the strategy, with 83 percent of respondents agreeing that it helps explain outperformance.
“Our research confirms that both popularity and desire for even greater adoption of factor investing are growing,” Bernhard Langer, CIO of Quantitative Strategies at Invesco, said in a statement. “But given the diverse nature of investors, the asset management industry needs to consciously address their clients’ needs for a tailored and consultative approach towards the implementation of factor-based strategies.
“Global trends in factor investing are resonating across the U.S. as well, with investors seeking efficient vehicles for yield and risk protection, driving flows into smart beta fixed income strategies and low volatility ETFs,” added Dan Draper, Invesco’s Global Head of PowerShares.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
