The extraordinary performance of mega-cap tech stocks has had a significant impact on returns, creating both opportunities and challenges for institutional investors, according to Invesco.
The findings are based on Investco’s ninth year in a row The Invesco Global Systematic Investing Study (IGSIS) based on the opinion of 131 institutional investors and brokers who manage it together $22.3 billion. It shows the increasing number of investors who are using alternative strategies as they adapt to the complexities and rapidly changing trends of the market.
Tech stock dominance requires systematic investing
Invesco found factors related to the success of major technology companies such as Momentum, Growth and Quality have performed strongly over the past year, while Value has underperformed. Now, prison risk has accounted for more than half the change (52%) of investors increasing their investment in Value over the past 12 months as they look for a viable alternative.
“The recent exceptional performance of mega-cap technology stocks has prompted investors to rethink their approach to perceived issues related to stability, product flexibility, risk management and exposure balancing,” said Georg Elsaesser, senior portfolio manager, Quantitative Strategies at Invesco. “These problems have shown the importance of risk management. There is a big difference between looking at the rise in a few stocks and the idea of ​​harvesting something important.”
The evolution has made it possible for institutional investors to thrive in this environment. In the last 12 months, 46% of systematic investors reported higher performance for both traditional and market-weighted strategies, compared to lower equity performance. 8% and 6% respectively.
The need for flexible drives increases stability
The need to react quickly has led to a proliferation of strategies that enable portfolios to adapt immediately to sudden changes in the larger environment. Four and five (80%) of the respondents mentioned tilting methods as the most important, whereas 67% pointed out the importance of group types and rotation parameters.
An important driver of product distribution, cited by four out of five (82%) of investors, and the desire to adapt to financial trends. This is also reflected in the fluctuation of the weighted items, almost all (91%) investors now adjust their weights over time, increasing from three quarters (75%) in 2023.
“We have seen a trend of consolidation over the past years, which shows a growing interest among investors in translating the cyclical factor into different sectors,” added Elsaesser. “We see a lot of volatility in asset allocation over time with a long-term view. Investors stay away from short-term asset allocation.”
As markets change, investors’ time is shrinking. When 40% Investors still evaluate their performance over the next 3-5 years, the third quarter (32%) now use a two- to three-year vision, from less than a quarter (23%) in 2023.
An increase in the grouping of other products in the fixed sectors
Invesco found a clear path to diversified businesses, including a significant increase in the use of alternative investment strategies. This study shows 40% of investors are now using a more sustainable approach to real estate (vs. 31% in 2023), 36% to things (vs. 26% in 2023) and 34% to both privacy and infrastructure (vs. 32% and 28% in 2023 respectively).
This diversity allows investors to create more integrated models of multi-asset allocations. A European investor said, “Our systematic approach now covers both liquid and illiquid assets. Such visibility allows us to better manage risk and find opportunities for assets that we would have missed before.”
However, the use of liquidity reduction strategies can present challenges, especially considering the limited liquidity that is critical for institutional and small business investors in building multi-asset portfolios..
Institutional investors have addressed this by using tools such as liquid proxies or derivatives, which enable them to change the nature of less liquid assets such as real estate, while being able to refinance quickly.
“We have the tools to handle different types of teams, but the problem is that we can take action when risks are identified,” said the North American businessman. “We are developing ways to ensure that illiquids are shown to have the same performance as liquid exits.”
Data transfer is ongoing
Fueling the rise of more diversified and systematic portfolios are the data revolutions that are changing the way investors make decisions. The availability of increasingly diverse sources to inform portfolio allocation has made this possible.
Even macroeconomic data (97%), necessary corporate income (81%), and skill evaluation indicators (76%) is often used, the integration of other data sources is also growing, by a quarter (23%) of the respondents including other data such as satellite images, transmission data and weather information in their models.
AI continues to be deployed in many areas of the financial system. In line with other investment styles, conservative/active strategies are seen as the most likely to benefit from AI.
“AI is rapidly evolving from a connecting tool to a cornerstone of modern investment strategies, and its ability to analyze large amounts of data to see patterns, identify trends and provide quick insights makes it well-suited for strategic investment.” Elsaesser said. “Challenges include data quality, security, and transparency, however, as well as the pursuit of sustainable alpha possibilities within AI-enhanced processes.”
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