Quants poised to take over the world of bonds: Invesco

The quant revolution in fixed income is here at long last, if the latest Invesco Ltd. poll is anything to go by. 

With the work-from-home era fueling a boom in electronic trading, the majority of investors in a $31 trillion community say they now deploy factor strategies in bond portfolios. 

It’s the latest evidence the systematic crowd are running wild in a market long seen as hostile to their allocation methods. The strategies have been put into practice by 55% of respondents compared with 40% last year. 

Conviction has been rising in recent years that slicing bonds by factors like value and price momentum provides a way to outperform traditional investing styles. After a decade-long debt rally drove yields to almost nothing, Wall Street is more receptive to the pitch than ever. 

In the exchange-traded fund market, smart-beta bond products — those that use factors to guide exposure — have drawn $13.5 billion this year, according to data compiled by Bloomberg Intelligence. That’s already a record haul which has lifted 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 meaningful,” the Invesco survey cites an unnamed North American institutional investor as saying. “Incorporating factors within our fixed income strategies has helped us find a way to navigate through this period.”

The study, dated as of March, surveyed 241 institutional and wholesale investors that use factors in some way. It found that the most commonly used fixed-income varieties include value, quality and carry. Many money managers also use macro styles such as duration, liquidity and inflation. 

Other highlights include:

• In the equity world, Invesco found that the long-embattled value strategy has regained favor, consistent with market trends since economies began to recover from the pandemic late last year.
• 87% say they allocate to the factor — which likes shares that are cheap compared to price fundamentals — compared with 82% last year. 42% have boosted exposure to the investing style over the past 12 months and 46% say they kept it unchanged.
• 48% say they use factors to help incorporate environmental, social and governance concerns. Among them, 72% apply ESG screens before using their factor model while 57% incorporate ESG variables into their models.
• 41% say ESG is completely independent of investment factors, 29% say it is indirectly incorporated in other factors like quality while 30% say it’s a factor on its own.
• In the year through March, 50% say factors performed in line with traditional active strategies while 34% say they underperformed. Compared to market-weighted strategies, the answer was mixed, with 38% saying factors did worse.
• Over the next 12 months, 57% say they plan to maintain factor allocations in their overall portfolios, 35% see increases and 8% see cuts.