Investors bemoan significant lack of suitable smart beta products in fixed income

Tom Eckett

a man wearing glasses and a suit

Fixed income is the area in smart beta that remains insufficiently covered by current products, according to Invesco’s Global Factor Investing study.

The report, which surveyed 241 factor investors, found 88% of institutional and 86% of wholesale respondents said fixed income smart beta was not adequately covered by the current product set.

This is compared to the equity space where just 25% of institutional and 15% of wholesale investors pointed to issues with current products.

The poor range of products available comes at a time when there is an increasing interest over the past year in implementing factors in fixed income.

Some 70% of institutional and 78% wholesale respondents believe factor investing can be extended to fixed income, up from 62% and 57%, respectively in 2018.

Investors highlighted an increase in research efforts as well as a stronger theoretical justification for factor premiums in the fixed income market which has many inefficiencies.

Georg Elsaesser (pictured), senior portfolio manager at Invesco, and author of the report commented: “Despite demand for the application of factor strategies within fixed income, a shortage of appropriate products is still evident.

“This reflects perceptions of coverage in terms of quality, not just quantity,” he continued. “As such only a minority of factor investors have made an allocation to fixed income.”

Smart beta fixed income – tool or threat?

Along with a lack of smart beta products in the fixed income space, investors highlighted other issues such as a lack of consensus around the factor definitions in fixed income and price modelling challenges.

The report also said a research burden and data requirements for applying factor investing to fixed income could be beyond existing capabilities for some investors while a potential for confusion between terms was another issue.

“For example, there was uncertainty around how the performance of the quality factor within equities (based on companies with low debt, stable earnings growth and profitability) would relate to the performance of a quality factor within fixed income (based on low volatility bonds with short maturities and low default risk),” Elsaesser explained.

“In general, there was a view that for fixed income it was harder to simulate performance and as such some investors exploring fixed income allocations were planning to run paper portfolios to understand how theoretical results played out in a quasi-real-world setting.”

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