Growing investor confidence in equities following the US election in November has caused a shift in allocations to more aggressive strategies, according to MSCI.
Low volatility and quality, and to some extent yield, being the more defensive factors, tend to outperform in periods of uncertain economic outlook, while value and size, which are more growth-sensitive, are the focus of investor attention in positive or improving economic and market conditions. As such, there has been a rotation in recent weeks, particularly after the US election, from the defensive factors into growth-sensitive strategies, said Dimitris Melas (pictured), global head of Equity Research at MSCI.
MSCI reported last month that in the year to September 30 global factor-based exchange-traded funds (ETFs) attracted $51bn in net cash flows, with $17.5bn of those going in ETFs linked to MSCI's factor indices.
Globally, MSCI's factor indices now have more than $170bn in assets under management (AUM) following them, the report said.
"Factor indices are a very significant part of MSCI's business and a priority going forward," said Melas. The shift to passive factor investment is only at its beginning, and there is a large pool of investors that are only now starting to think about employing factor strategies, Melas noted. "MSCI currently has US$10tn of AUM that follow our benchmarks; this AUM includes factor indexes which have been growing at an average rate of some 40% pa in the past few years."
In particular, MSCI reported significant growth in assets specifically linked to its minimum volatility indexes, which grew by 122% on an annual basis to $35.4bn.
More recently, however, especially after the US election and ensuing rally, investors expect higher rates of growth and interest rates, hence low volatility and the other defensive factors have underperformed, while value and low size have done well, Melas noted.
"While factor investing has been around for a while, the predominant view up until 5-10 years ago was that indices represent the return of a particular market or asset class," Melas said. "However, investors are becoming increasingly aware that indices can also be used to gain exposure to various factors, and demand for factor strategies is expected to continue growing rapidly. Investors appreciate they can now cheaply and efficiently gain exposure to various factors, and demand for factor strategies is expected to continue growing rapidly," he said.
The convergence of factor investing and environmental, social and governance (ESG) integration has been one of the main trends in the market in the last couple of years, according to Melas. "Investors increasingly realise that they need to integrate ESG considerations because they affect the long-term risk and performance profiles of the asset," he said, adding that MSCI sees a lot of interest and demand in the ESG space.
Click here to read MSCI's full report.
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