As mega-cap technology stocks continue to shape market dynamics, systematic investors are responding with new strategies to mitigate concentration risks and diversify their portfolios, according to Invesco’s latest research.
That's one of the main findings from Invesco's ninth annual Invesco Global Systematic Investing Study, which draws on insights from 131 institutional and retail investors managing a combined $22.3 trillion in assets.
According to the study, the blockbuster performance of large tech stocks has elevated factors like momentum, growth, and quality over the past year, while pushing underperforming value down in systematic portfolio strategies. However, Invesco’s data reveals that 52 percent of investors increased allocations to value factors over the past 12 months to reduce exposure to tech-heavy portfolios and seek additional diversification.
“The continued growth of U.S. mega-cap technology companies has led to increased concentration in the global equity markets, which may create unintended risks in multi-asset portfolios,” Mo Haghbin, head of solutions, multi-asset strategies at Invesco, said in a statement.
Invesco's survey also indicates systematic strategies perform better than traditional methods. Over the past year, 46 percent of systematic investors noted outperformance over traditional active and market-weighted approaches, with only 8 percent and 6 percent reporting underperformance respectively.
Factor tilting and rotation models are also proving their worth in adapting to market shifts, with 80 percent of respondents view factor tilting as essential for managing portfolio allocation, while 67 percent cited sector rotation as crucial in their strategies.
As the markets become more dynamic, investors are also shortening their evaluation periods. While 40 percent of respondents still gauge performance on a traditional 3- to 5-year basis, the study found that 32 percent now use a shorter 2- to 3-year time horizon, a marked increase from 23 percent in 2023.
The research also touched on the rise of systematic approaches in alternative asset classes. Currently, 40 percent of investors apply systematic strategies to real estate – up from 31 percent in 2023. Commodities have seen a similar basis-point jump, with 36 percent of investors now using systematic methods, compared to 26 percent last year. Similar stories played out in private equity and infrastructure, reflecting broader efforts to diversify beyond traditional equities and bonds.
However, liquidity remains a significant sticking point, with institutional and retail investors citing it as a challenge when building less liquid asset classes into multi-asset portfolios. To help cure that, Invesco said investors are turning to liquid proxies and derivatives that offer exposure while retaining the ability to rebalance rapidly.
“We’re seeing higher allocations to private markets across the board, specifically within private credit and real estate,” Haghbin said.
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