Invesco

Global Systematic
Investing Study
2024

This document is not intended for members of the public or retail investors.
Full audience information is available inside the front cover.
Executive summary
Welcome to Invesco’s Global Systematic Investing Study Theme 1 03 Theme 2 11
2024. This year’s study continues to provide valuable insights
Navigating complexity: the rise of systematic The evolution of multi-factor investment strategies
into the rapidly evolving landscape of systematic investing, strategies in multi-asset portfolio construction Theme two explores how multi-factor strategies
chronicling the latest innovations and how practitioners The first theme highlights how investors are have become the norm as investors seek to capture
increasingly embracing systematic strategies to a broader spectrum of risk and return opportunities
globally are leveraging advanced quantitative techniques build resilient multi-asset portfolios. In response to a in a complex macro-environment. The dominance of
across asset classes. rapidly changing investment landscape characterized mega-cap tech stocks is reshaping market dynamics,
by market volatility and shifting asset correlations, prompting investors to recalibrate their strategies
investors are moving towards more adaptive, data- and adopt more diversified approaches to factor
Based on interviews with systematic investors, defined as investors that employ
driven approaches capable of navigating complex allocation.
structured, rules-based quantitative models and algorithms to make investment
market dynamics.
decisions, this research collects the opinions of senior decision-makers responsible for
managing $22.3 trillion in assets (as of 31 March 2024). We are pleased to share these
valuable perspectives on the future of systematic investing worldwide.

This year’s study reveals a shift towards more sophisticated, integrated systematic
approaches across multiple asset classes. Investors are increasingly leveraging artificial
Theme 3 19 Theme 4 26
intelligence and machine learning to enhance their decision-making processes, while
AI’s expanding role: From investment tool to strategic An active approach to ESG: The rise of customized,
also grappling with the complexities of Environmental, Social and Governance (ESG)
imperative systematic strategies
integration and the challenges posed by a rapidly changing macro environment. The
Theme three chronicles the rising adoption of artificial In theme four, we find the ESG landscape is
following themes explore how systematic investors are adapting their strategies to
intelligence (AI) in investment processes. Over half undergoing a transformation as investors increasingly
navigate these new frontiers, balancing innovation with risk management in pursuit of
of investors now incorporate AI in some form, with demand highly customized solutions to meet
robust, long-term performance.
applications ranging from pattern recognition to their unique sustainability objectives. Systematic
portfolio optimization. While investors see significant approaches have emerged as the vanguard of this
potential in AI, challenges around interpretability and evolution, offering the flexibility and scalability
data quality persist. required to create highly tailored ESG strategies.

This presentation is for Professional Clients, Financial Advisers and Qualified Clients/Sophisticated Investors (as defined in the important information
Mo Haghbin at the end); for Institutional Investors only in the United States; for Sophisticated or Professional Investors in Australia; in New Zealand for wholesale
Head of Solutions, investors (as defined in the Financial Markets Conduct Act); for Professional Investors in Hong Kong; for Qualified Institutional Investors in Japan;
in Taiwan for certain specific Qualified Institutions/Sophisticated Investors; in Singapore for Institutional/Accredited Investors; for Qualified Institutional
Multi-Asset Strategies Investors and/or certain specific institutional investors in Thailand; for certain specific sovereign wealth funds and/or Qualified Domestic Institutional
Solutions Strategy & Platform Investors approved by local regulators only in the People’s Republic of China; for Qualified Professional Investors in Korea; for certain specific institutional
investors in Brunei; for certain specific institutional investors in Malaysia upon request; for certain specific institutional investors in Indonesia and for
qualified buyers in Philippines; In Canada this document is restricted to investors who are (i) Accredited Investors and (ii) Permitted Clients, as defined
mo.haghbin@invesco.com under National Instrument 45 106 and National Instrument 31 103, respectively. It is not intended for and should not be distributed to, or relied upon by,
+1 212 323 0485 the public or retail investors. Please do not redistribute this document.
02
T H E M E 1

Navigating
complexity: the
rise of systematic
strategies in multi-
asset portfolio
construction

The investment landscape is In response, investors are This shift is characterized by a

evolving rapidly, with market increasingly embracing move towards more adaptive,
volatility and shifting asset systematic strategies to build data-driven approaches capable
correlations challenging traditional resilient multi-asset portfolios of navigating complex market
portfolio construction methods dynamics
03
The global investment landscape has been evolving rapidly.
Investors face a shifting terrain: market volatility, asset classes
You have two levers to pull:
decoupling unpredictably, and new investment vehicles Can you detect risk quicker
emerging. Traditional portfolio construction approaches have and avoid it? Or can you
come under unprecedented pressure. find opportunities that
your peers cannot and go
full throttle?

Institutional Investor
North America

With investors seeking a more adaptive approach Our interviews highlight varying priorities for
Figure 1.1 Institutional
to portfolio construction in this environment, institutional and wholesale investors when
Considerations in multi-asset portfolio construction, Score /10 Wholesale
systematic strategies have gained traction. As constructing multi-asset portfolios (figure 1.1).
data-driven, rules-based approaches, they offer For institutional investors, liquidity constraints
investors a powerful tool for navigating complexity rank as the top consideration, scoring 8.0 out of
and achieving investment objectives. A growing 10 in importance. Following closely behind are 8.0
cohort of investors is exploring their potential to minimizing volatility, ensuring low correlation of Liquidity constraints
manage risk, identify opportunities, and optimize assets, and minimizing drawdowns. Wholesale 7.4
returns across various market conditions. This investors, while also prioritizing these factors,
trend is not merely a refinement of existing place a greater emphasis on minimizing 7.8
practices but represents a reimagining of how drawdowns and ensuring low correlation of Minimizing volatility
investment portfolios are built and managed. assets, reflecting their focus on client-facing 7.6
outcomes.
The changing face of portfolio These priorities were seen to align closely Low correlation of assets
7.6

construction with the capabilities of systematic strategies. 7.8

An institutional investor from North America
highlighted this shift in thinking: “We’re moving
Traditional approaches to multi-asset portfolio 7.4
beyond static allocations to a more dynamic, Minimizing drawdowns
construction have typically relied on strategic
data-driven approach that can better navigate 8.0
asset allocation based on long-term expected
volatility and capture opportunities across asset
returns and correlations, combined with periodic
classes.” This approach enables investors to
rebalancing. However, a rapidly changing market 7.2
address their key concerns – from maintaining Maximizing Sharpe Ratio
environment has exposed limitations in these
liquidity and minimizing volatility to ensuring 7.2
static approaches. As one wholesale investor
diversification and managing downside risk – in a
from Europe noted, “Systematic portfolio
more responsive and targeted manner.
strategies give us the agility to adapt to market
shifts while maintaining a disciplined approach to Rate the following factors in order of importance for multi-asset portfolio construction: (Score 1-10 where 10 is very important)
risk management.”

04
This year’s study finds factor tilting strategies and Figure 1.2 Very valuable
asset class/sector rotation models have emerged Value of systematic techniques for portfolio construction, % citations Moderately valuable
as highly valued systematic techniques for Not valuable
portfolio construction. An overwhelming 80% of
respondents cited factor tilting strategies as very
valuable, while 67% highlighted the importance
of asset class and sector rotation models Factor tilting strategies 80 18 2
(figure 1.2). As an APAC-based institutional
investor explained, “Our systematic models
now adjust allocations based on where we are Asset class and sector rotation models 67 30 3
in the economic cycle, allowing us to capture
opportunities and manage risks more effectively
across different market regimes.” Quantitative trend following models 44 46 10

Correlation matrix analysis for

diversification 43 51 6

Volatility targeting frameworks 41 44 15

Adaptive machine
learning techniques 33 43 24

Risk parity weighting methodologies 28 54 18

Maximum Sharpe ratio

optimization algorithms 28 57 15

Regime prediction indicators 22 53 25

Mean reversion positioning strategies 11 64 25

What systematic techniques do you think are effective for adding value during portfolio construction?

05
 Systematic approaches extend across asset classes

While systematic strategies have long been from Europe noted, “Our systematic approach
Duration has crept into associated with equity investing, our study now spans both liquid and illiquid assets.
equities so we are applying reveals these approaches are increasingly This holistic view allows us to better manage
being applied across a wide range of asset overall portfolio risk and capture cross-asset
fixed income logic to look classes. Equities remain the most common opportunities that we might have missed before.”
at our portfolio on a more area for systematic investing, with 99% of
respondents applying these strategies to their However, the application of systematic strategies
harmonized basis equity portfolios. However, fixed income is not to less liquid assets is not without challenges.
far behind: 88% of investors now use systematic An institutional investor from North America
approaches in this asset class (figure 1.3). pointed out, “For illiquid assets, portfolio
optimization is harder because of data and
Perhaps more striking is the growing application pooling complications.” Despite these hurdles,
Wholesale Investor
of systematic strategies to alternative assets. Our many investors see potential in extending
Europe
study shows 40% of investors now use them in systematic approaches to these areas, with 59%
real estate, 36% in commodities, and 34% in both believing systematic strategies could be applied
private equity and infrastructure. to real estate over time, and 62% seeing potential
applications in commodities.
This expansion is enabling investors to build more
holistic and integrated multi-asset allocation
models. For example, one institutional investor

Figure 1.3 2023

Application of systematic approach across asset classes, % citations 2024
Could be applied

98 99 100
96
88

73

62
59
52 53

40
36
34 34
31 32
28
26
24

2 2

Equities Fixed Income Real Estate Commodities Private Equity Infrastructure Cryptocurrencies
In which asset classes of your portfolio are you using a systematic approach? In which parts of your portfolio do you think a systematic approach could be applied?
06
The data revolution in portfolio management

Underpinning the rise of systematic portfolios is for allocating weights to these different data
a data revolution transforming the way investors sources and this output goes into our portfolio Figure 1.4
make allocation decisions. Our study reveals construction engine.” Data that feeds into portfolio allocations, % citations
investors are drawing on a diverse range of
sources to inform their portfolio allocations, The integration of alternative data sources
with macroeconomic data (97%), fundamental is also gaining momentum, with 23% of Macroeconomic data
97
company financials (81%), and technical analysis respondents including alternative data such as (GDP, inflation, employment etc.)
indicators (76%) being the most commonly cited satellite imagery, shipping data, and weather
(figure 1.4). information in portfolio allocation models. While
Fundamental company financials
still a minority, this trend points to the growing 81
(earnings, ratios, etc.)
This wealth of data is enabling investors to sophistication of systematic strategies and their
take a more systematic approach to portfolio ability to leverage non-traditional information
management. As one institutional investor from sources for asset allocation decisions.
Technical analysis indicators
North America explained, “We have an algorithm 76
(price trends, volatility, momentum)

Market framing data 41

(positioning, flows, sentiment)

Alternative data (satellite imagery,

shipping data, weather etc.) 23

Crowdsourced data tools 16

(surveys, prediction markets)

What data feeds your signals for portfolio reallocations?

07
Rebalancing reimagined

As the use of systematic strategies develops, This reveals an important consideration in

traditional calendar-based portfolio rebalancing rebalancing: the varying liquidity profiles of Figure 1.5 Institutional
is giving way to more fluid methods. While time- different asset classes. While highly liquid assets Strategies used for rebalancing allocations, % citations Wholesale
based rebalancing remains prevalent (used like large-cap equities or government bonds can
by 74% of institutional and 51% of wholesale be easily rebalanced, less liquid assets such as
investors), there is a growing adoption of more real estate or private equity present challenges. Time-based rebalancing 74
sophisticated, responsive techniques (figure 1.5). Systematic investors are developing innovative on fixed calendar
approaches to address this, such as using liquid schedule 51
Threshold-based rebalancing, which triggers proxies or derivatives to adjust overall portfolio
portfolio adjustments when allocations drift exposures when direct rebalancing of illiquid
beyond predetermined bands, has been adopted assets is impractical. “We’re developing processes 53
Threshold-based
by 53% of institutional investors and 58% of for illiquid exposures to have similar performance
rebalancing bands tied
wholesale investors. Also popular is adaptive thresholds and exit strategies as liquid assets” said to drift from targets
rebalancing using market signals, which allows an institutional investor from North America. 58
for more responsive portfolio adjustments based
on changing market conditions. These methods The implementation of dynamic rebalancing
Adaptive rebalancing 53
reflect investors’ growing appetite for portfolios strategies often relies on sophisticated algorithms
frequency using
can be more responsive to market changes, all and data analysis. For example, some systematic market signals
within a systematic framework. investors are using machine learning techniques 44
to identify optimal rebalancing triggers based on
“We have systematic tools for various asset a combination of asset drift, market sentiment
classes, but the challenge is actionability when indicators, and macroeconomic signals. Others Discretionary, 25
risks are identified,” confided a North American are incorporating risk parity concepts into their judgement-based
institutional investor. “We’re developing rebalancing frameworks, adjusting allocations rebalancing calls 51
processes for illiquid exposures to have similar based on the contribution of each asset to overall
performance thresholds and exit strategies as portfolio risk rather than just market value weights.
liquid assets.” By focusing on the risk contribution of each asset
or strategy investors aim to maintain a more stable What strategies do you use for rebalancing your portfolio allocations?
risk profile even as market conditions change.

08
Systematic strategies in fixed
income

Fixed income has become a core component in

systematic multi-asset portfolio construction, Figure 1.6
signalling a shift in how investors integrate this Signals used for applying systematic strategies in fixed income, % citations
asset class into their overall strategies. Investors
are increasingly applying quantitative techniques
to bond markets, driven by two key factors. First, Macroeconomic indicators Because municipal
(e.g. GDP growth, inflation, 95
advancements in data availability and computing
employment, etc.)
markets in the US are so
power have made sophisticated analysis of fixed
income assets more feasible. Second, the volatile vast and unique, machine
Fundamental credit metrics
interest rate environment has necessitated more
(e.g. leverage ratios, interest 73
learning helps us capture
advanced methods for return generation and risk
management.
coverage, profitability) what offers the best tax
advantage and investment
“Our systematic models are helping us dynamically Momentum signals
adjust portfolio duration based on our interest rate
53 opportunity.
forecasts and risk tolerance. This has been crucial
in navigating the recent volatility in bond markets,”
Interest rate volatility signals
said a Middle Eastern institutional investor. 47
(e.g. swaptions, govt bond volatility)
Investors are leveraging a range of signals to Wholesale Investor
implement systematic fixed income strategies. North America
Carry and risk premia differences
Macroeconomic indicators (95%) and (e.g. credit spreads, roll down) 43
fundamental credit metrics (73%) are the most
widely used, followed by momentum signals (53%)
and interest rate volatility signals (47%) (figure 1.6). Technical price trend indicators
This reflects a growing recognition fixed income (e.g. moving averages, support/ 41
markets are influenced by a complex interplay resistance levels)
of factors which can often be better captured
Value metrics based on
through systematic approaches. These models
bond characteristics relative to 39
are also being used to exploit relative value
historical norms
opportunities across the fixed income universe.
“We’re using machine learning algorithms to
identify mispricing, taking into account a wide Sentiment and positioning
range of factors including credit quality, sector (e.g. surveys, fund flows) 28
dynamics, and macroeconomic indicators,”
shared an APAC based institutional investor.
Which signals do you look for when implementing systematic fixed income strategies?

09
Commodities: a new(er) frontier for systematic strategies

Commodities are increasingly being considered Another North American institutional respondent
by investors for inclusion in systematic multi-asset added, “In our risk parity approach, commodities Figure 1.8 Institutional
portfolios. Some investors view commodities as play a crucial role. They help us balance risk Implementation of commodity exposure, % citations Wholesale
potentially offering diversification benefits due across different asset classes, particularly
to their historical performance patterns relative during inflationary periods when traditional
67
to traditional assets. Additionally, respondents assets might struggle”. A Middle East-based Physical commodity holdings
revealed they were exploring commodities as a wholesale respondent shared, “We incorporate 37
possible hedge against inflation risks (figure 1.7). commodities into our macro-based models.
Implementation varies between investor types, Their sensitivity to global economic conditions
51
with institutional investors favoring physical provides valuable signals that complement our
Futures contracts
holdings (67%) and futures (51%), while wholesale other asset classes”. 49
investors prefer ETPs (Exchange Traded Products)
(67%) (figure 1.8). As systematic multi-asset portfolios evolve,
commodities are likely to play an increasingly 33
When discussing the multifaceted role of important role. Their unique return characteristics Diversified commodity index swaps
22
commodities, several respondents highlighted and the ability of systematic strategies to navigate
their versatility and ability to address specific their complexities offer investors a powerful
portfolio needs. A European institutional investor additional tool for building portfolios. 23
explained, “Commodities often exhibit strong Equity stocks tied to commodities
22
trends, making them a good fit for our trend-
following algorithms”.
23
ETPs
67

Figure 1.7
Goal of commodity allocations, % citations How are your commodity positions implemented?

Diversification 83

The future of systematic multi-asset investing

Inflation hedge 57
As systematic approaches continue to mature, By leveraging data, technology, and quantitative
they are not just optimizing existing strategies techniques, investors are developing more
but reshaping the foundations of portfolio dynamic, responsive, and robust approaches
Enhanced returns 51 construction. The ability to process large amounts to navigating complex market environments.
of data, identify complex patterns across asset As these strategies continue to evolve, they
classes, and make dynamic allocation decisions is promise to offer new possibilities for managing
enabling investors to build more resilient portfolios risk, identifying opportunities, and achieving
Risk balancing asset 51 capable of navigating an increasingly complex and investment objectives.
volatile investment landscape.

Access unique risk premia 25

What is the goal of commodity exposure in your portfolio?

10
T H E M E 2

The evolution
of multi-factor
investment
strategies

Multi-factor strategies are now the Mega-cap tech stock dominance Investors are adopting more
norm as investors seek to capture is reshaping market dynamics, diversified approaches to factor
a broader spectrum of risk and prompting investors to recalibrate allocation, adjusting exposures
return opportunities in a complex their strategies in response to changing market
macro-environment conditions and the economic cycle
11
 This mega-cap tech stock surge has significantly
This year’s study reveals the rise of pro-active impacted factor returns, creating both
opportunities and challenges for factor investors.
multi-factor strategies as the preferred choice for Certain factors - notably Momentum, Growth,
and Quality - have performed exceptionally
systematic investors. This shift reflects growing well, aligning with the success of large tech
companies. In contrast, others, including Value,
sophistication among investors as they seek to Low Volatility, and Size, have underperformed the
broader market (figure 2.1). For many investors,
capture a broader spectrum of risk and investment these divergent factor performances have
highlighted once again the importance of pro-
opportunities in an increasingly complex macro- active multi-factor strategies in navigating rapidly
changing market conditions.
environment. The need to be adaptive has been
underscored by recent market dynamics, particularly
the extraordinary performance of mega-cap
technology stocks over the past year.

Figure 2.1 Figure 2.1

Global index returns (%) Global index returns (%)

12 months to 29th March 2024 3 months to 29th March 2024

37.0
33.9 35.0
30.8
25.8
23.3 22.6
21.7

15.8
14.5
10.7 11.4 10.9
9.6
8.3 7.8

World Value Quality Momentum Low Growth Yield / Size World Value Quality Momentum Low Growth Yield / Size
Vol Carry Vol Carry

Relative factor Relative factor

performance (%) performance (%)
(12 months to 29th March) -7.5 10.6 11.7 -13.7 2.5 -12.6 -8.8 (3 months to 29th March) -10.3 15.3 9.1 -13.4 0.9 -13.9 -10.8
Past performance is not a Past performance is not a
guarantee of future results. guarantee of future results.

Source: https://www.msci.com/end-of-day-data-search
Indexes: ACWI, ACWI ENHANCED Value, ACWI QUALITY, ACWI MOMENTUM, ACWI MINIMUM VOLATILITY (USD), ACWI GROWTH
TARGET, ACWI HIGH DIVIDEND YIELD, ACWI SIZE TILT,
All in Gross USD terms.
12
On average, the investors in our study have fared Figure 2.2 Outperformed
well in this environment, over the 12 months to the Performance of systematic/factor strategies, % citations In-line
end of March 2024, 46% of respondents reported Past performance is not a guarantee of future results Underperformed
their systematic/factor strategies outperformed
traditional active strategies, whilst 46% also saw 2023 2024 We think the rest of the
outperformance relative to market-weighted
strategies. This contrasts with 8% and 6% reporting
market will catch up with
underperformance, respectively (figure 2.2). the ‘big seven’ so we are
However, this environment has led to
27 33 trying to play that position
46 46
concentration risk and challenges in maintaining with factors while having
balanced exposures. As one North American
wholesale investor noted: “The performance
really good exposure to the
of mega-cap technology stocks has skewed seven so there is not too
traditional factor relationships. We’re observing
high correlations between Momentum, Growth, 53 much benchmark risk.
and Quality factors, which poses challenges for 57
diversification within multi-factor portfolios.” 46
48
Wholesale Investor
Europe
20
10 8 6

Relative to Relative to Relative to Relative to

traditional active market weighted traditional active market weighted

How have your systematic/factor strategies performed in terms of return relative to traditional active / market weighted strategies
over the past 12 months (to the end of March 2024)?

13
This concentration risk has prompted investors Figure 2.3 Increased
to seek solutions through factor investing, for Changes to factor allocations over last 12 months, % citations Maintained
example, via an increase in allocations to Value Decreased
as a potential hedge. Notably, 52% of investors
increased their allocation to Value over the last
12 months, making it the factor with the highest Value 52 36 12
percentage increase (figure 2.3). A European
wholesale investor explained their approach:
“While we’ve benefited from the strong Growth 50 44 6
performance of Growth and Momentum, we’re
increasingly looking to balance this with Value
Momentum 47 52 1
exposure. When market dynamics shift, they can
do so rapidly, and we want to be well-positioned
for such eventualities.” 42 55 3
Yield / Carry

Quality 39 55 6

Low Volatility 24 65 11

Size 19 64 17

Middle East Increased APAC Increased Europe Increased North America Increased
Maintained Maintained Maintained Maintained
Decreased Decreased Decreased Decreased

Value 92 8 0 Value 65 27 8 Value 31 46 23 Value 49 42 9

Growth 82 18 0 Growth 61 39 0 Growth 41 50 9 Growth 38 52 10

Momentum 83 17 0 Momentum 50 50 0 Momentum 29 66 5 Momentum 45 55 0

Yield / Carry 25 75 0 Yield / Carry 40 60 0 Yield / Carry 45 55 0 Yield / Carry 43 50 7

Quality 44 56 0 Quality 42 58 0 Quality 42 47 11 Quality 31 63 6

Low Volatility 25 75 0 Low Volatility 42 58 0 Low Volatility 10 67 23 Low Volatility 26 64 10

Size 33 67 0 Size 14 72 14 Size 25 44 31 Size 14 77 9

Over the last 12 months, have you increased, decreased, or maintained your allocations to these factors (ignoring market impacts)? 14
Momentum builds for a more diversified allocation approach

The trend towards a more diversified approach to The drivers behind pro-active factor allocation
factors has been a consistent finding in our study are multifaceted, with several key motivations
Factors are not mutually
over the past eight years, and it continues to gain emerging from the research. Foremost amongst exclusive, and we combine
momentum. This year’s results show a marked these is the desire to adapt to economic
acceleration, with 91% of investors now adjusting cycles, with an overwhelming 82% of investors
them to create a diversified
their factor weights over time, an increase from interviewed citing this as a primary reason for portfolio that balances risk
75% in the previous year (figure 2.4) adjusting their factor allocations (figure 2.5).
This trend reflects a growing sophistication
and potential return.
amongst investors in aligning their portfolios with
anticipated factor performance across various
economic phases.
Institutional Investor
Europe

Figure 2.4 No Figure 2.5

Adjust factor weights through time, % citations Yes Reasons for adjustments, % citations (those that adjust weights)
0
9 Adjust based on expected performance of factors at 82
15 12 15 different points in economic cycle
25

Adjust to balance factor exposures of overall portfolio 73

Adjust to take advantage of pricing opportunities 59

88 100
91
85 85
75 Adjust to adapt to changes in factor correlations 57

Adjust based on past performance

53
(historic risk/return profile of factor)

Adjust based on updates/

16
revisions to academic research
2023 2024 Middle East APAC Europe North America

Do you adjust your factor weights through time? [If yes] why do you adjust your factor weights through time?
15
Portfolio balance also plays a crucial role, as 73% Figure 2.6 2024
of respondents report adjusting factor weights Time frame to assess factor performance, % citations 2023
to optimize overall exposure. Furthermore, 59%
of investors leverage factor adjustments to
exploit pricing inefficiencies in the market. These 2
findings underscore the dual utility of pro-active Shorter than one year 2
factor allocation: it can serve not only as a tool for
tactical market positioning but also as a strategic 12
mechanism for comprehensive risk management. One year 8
As market complexity increases, the ability to
nimbly adjust factor exposures is increasingly 32
seen as a valuable skill in the investor’s toolkit. 2-3 years 23
The timeframe used to assess factor performance
40
has also evolved. Whilst 40% of investors use a
3-5 years 51
3-to-5 year horizon, there is a notable increase
in those using shorter time frames compared to
last year (figure 2.6). 32% now use a 2-to-3 year 14
horizon, up from 23% in 2023. An APAC-based 5-10 years 13
institutional investor explained this shift: “The
increased volatility and rapid shifts in market 0
regimes we’ve seen in recent years have made Over 10 years 3
us more responsive in our factor allocations.
We’re still focused on long-term factor premiums,
What time frame do you use to analyze / assess the performance of systematic/factor strategies?
but we need to be more agile in our tactical
positioning.”

A North American wholesale investor echoed

this perspective: “We used to assess across a full Figure 2.7 More dynamic
market cycle but can’t do that anymore, either Change in approach to systematic/factor investing, % citations No change
clients aren’t letting you or now economic cycles More static
seem to be lasting a glacial age, so we have set it
Past two years Next two years
to be 18 to 24 months and if we don’t see a reason
to stick with a certain factor then we’re willing to
make a change.”
29
Looking ahead to the next two years, this trend
45
shows no signs of slowing down, with 48% of 48 54
institutional investors and 58% of wholesale
investors anticipating a move towards an even
more dynamic approach (figure 2.7). “We’ve had
to become more dynamic, not chasing yield but
chasing opportunity” said one North American 49
wholesale investor.
48 43
43

22
7 9
3
Institutional Wholesale Institutional Wholesale
How has your approach changed over the past 2 years? How do you expect it to change over the next 2 years?

16
Targeting diverse local flavors in the factor menu

Our study shows Value remains the most widely In North America, for instance, there is a strong
targeted factor (90% of respondents), followed preference for Value (93%), with Momentum (78%)
Some of the typical factors
by Quality (74%), Momentum (69%), and Low and Quality (71%) also being widely adopted. we focus on have done
Volatility (63%). Growth is now targeted by The relatively high adoption of Yield/Carry (53%)
51% of respondents, indicating its increasing compared to other regions is also noteworthy. A
poorly in the US but well in
acceptance as a distinct factor (figure 2.8). North American institutional investor explained Europe.
their approach, “We’ve found that combining
Respondents consistently emphasized different Value and Momentum provides a good balance,
factors tend to outperform at different times whilst our focus on Yield/Carry factors helps in
and in different regions, requiring a dynamic the current interest rate environment.”
and geographically aware investment strategy. Institutional Investor
This perspective is supported by the data, which North America
shows distinct factor preferences across regions.

Figure 2.8
Factors targeted, % citations Total (A)
Middle East (B)
APAC (C)
100 Europe (D)
(B) 100 North America (E)
92 93
90 (E)
(A) (C) 92
81
(D) 83
78 77
74
69 71
69
65 63 62
60 62
57
54 52 53
51
48 49 48

36 38 38

29
23 24
19

Value Momentum Quality Low Volatility Growth Yield / Carry Size

What investment factors do you explicitly seek / have exposure to within your portfolio (or client portfolios)?
17
European investors show the highest emphasis The Middle East shows the highest adoption rates Rise in dynamism translating into growth of active factor ETFs
on Quality (83%) amongst all regions, with Value for Value (100%) and Momentum (100%), with
(81%) also being widely adopted. Interestingly, Growth (62%) also being more prominent than
Momentum (36%) has a much lower adoption rate in other regions. “As our markets evolve, we’re This increased dynamism is also evident in The ability of active ETFs to adapt pro-actively
compared to other regions. This lower emphasis finding that different factors come into play. The the rising adoption of active ETFs, especially to changing market conditions was also
on Momentum can be partly attributed to the high adoption of multiple factors reflects our amongst wholesale investors. These instruments emphasized. A North American wholesale
lower levels of technology stocks in European need to be adaptable as our economies diversify,” combine the rules-based, transparent approach investor explained, “The world has been binary
indices, with tech companies often driving said a Middle East-based institutional investor. of traditional ETFs with some elements of active focused on either Growth or Value, but we believe
momentum strategies. A European institutional management, typically through factor tilts or pro- that companies with different characteristics will
investor noted, “We find that a balanced factor This regional variation in factor adoption reflects active factor allocation. As a European wholesale potentially perform better in different periods
approach works well in European markets, given not just current market conditions, but also long- investor explained, “Active ETFs with factor in the economic cycle and we are looking for
the sector diversity and the varying economic term economic trends, home-bias in allocations, tilts allow us to offer our clients sophisticated products that can capture it.”
conditions across the continent.” regulatory environments, and investment investment strategies at a lower cost than
cultures specific to each area. It highlights the traditional active management.” This shift towards active ETFs reflects a broader
In the Asia-Pacific region, there’s notably high importance of understanding local market trend in factor investing: the need for more
adoption of both Value (92%) and Momentum dynamics when implementing factor strategies Respondents highlighted several key dynamic, adaptable strategies that respond
(92%) factors. Low Volatility (77%) is also more and the potential benefits of a regionally tailored advantages that are driving this popularity. to changing market conditions and regional
prevalent here than in other regions. “The rapid approach to factor investing. Cost‑effectiveness1 emerged as an important variations in factor performance. As investors
economic changes in many Asian markets mean benefit for some, with investors noting active become more sophisticated in their use of factors,
that both Value and Momentum can be effective, ETFs offer a middle ground between low-cost they are increasingly seeking investment vehicles
but often in different market segments or at passive ETFs and more expensive traditional that can keep pace with their evolving strategies.
different times. We often need to be nimble in actively managed funds. As one European
our factor allocations,” said an Asian wholesale wholesale investor remarked, “Active ETFs The rise of active ETFs in factor investing
investor. allow us to access certain strategies at a more also speaks to a growing recognition factor
competitive price point than traditional active performance can vary significantly across different
management.” market regimes and geographic regions. By
offering more flexible factor exposures, active ETFs
were seen as a tool to capitalize on these variations
more effectively than traditional static products.

1 Since ordinary brokerage commissions apply for each buy and sell transaction, frequent trading activity may increase the cost of ETFs.
18
T H E M E 3

AI’s expanding role:

From investment
tool to strategic
imperative

AI adoption in investment Generative AI is opening new While investors see significant

processes continues to grow, opportunities, helping to uncover potential in AI, challenges around
with over half of investors now hidden market inefficiencies and interpretability and data quality
incorporating AI in some form spawn innovative strategies persist

19
The investment landscape is undergoing a transformation as
artificial intelligence (AI) rapidly evolves from a peripheral tool to
a cornerstone of modern investment strategies. Our latest study
reveals a significant leap in AI adoption, with 59% of investors now
incorporating AI into their investment processes, up from 47% in
the previous year (figure 3.1).

Figure 3.1 AI used extensively (A)

Use of AI in investment process, % citations AI used to limited extent (B)
Do not use AI in but considering (C)
Do not use AI and not considering (D)
AI is advancing more
0 rapidly than many
9 6
(A)
9
15
anticipated. It’s become
27 30 a critical factor in our
investment process.
38
(B) 55 Institutional Investor
50
APAC

70 44

65
42
(C) 29
29

15 26
11 8
(D) 12 10
0 0

2023 2024 Middle East APAC Europe North America

Do you incorporate AI into your investment process? 20

The applications of AI in investment are diverse and Emerging AI applications are gaining traction rapidly. Furthermore, 42% of respondents now use AI to
expanding. Pattern recognition in market behavior For instance, 47% of respondents now employ AI for monitor and adjust investment positions in real-time,
remains the most prevalent use, cited by 90% of sentiment analysis of news, earnings calls, and social up from 35%. This application demonstrates AI’s
respondents, up from 84% last year (figure 3.2). This media, up from 35% last year. This real-time gauge potential not only to inform investment decisions but
is closely followed by portfolio optimization and risk of market sentiment offers a potential edge in fast- also to execute them with unprecedented speed and
management (70%, a slight increase from 69%), and moving markets. As an institutional investor from precision. An institutional investor from APAC shared,
the development and testing of investment strategies North America noted, “AI enables us to process vast “We use AI modules to monitor our investments
(67%, a substantial rise from 53%). amounts of data that was previously inaccessible.” and automate the timing of trading decisions. This
has enabled us to measure, and up to a certain
level, control risks.” Echoing this sentiment, a North
American wholesale investor added, “The use of AI in
execution has proven to be incredibly valuable.”

Figure 3.2 2023

How using AI in investment process, % citations
2024

84
Identify patterns and trends in market behavior
90

69
Optimize portfolio allocation and risk management
70

53
Develop and test investment strategies
67

35
Perform sentiment analysis on news, earnings calls and social media
47

35
Monitor and adjust investment positions in real-time
42

16
Automate timing of trading decisions
19

How do you use AI in your investment process? 21

AI applications across investment strategies

Our study reveals investors see varying levels of For fundamental active strategies, AI scored 7.4 out and transaction costs, both crucial components of
importance for AI across different investment styles. of 10 in importance. Risk management stands out successful passive investing. A European wholesale For us it is crucial to
Systematic/factor strategies are viewed as the most as the primary application in this area, with portfolio investor noted: “AI is helping us optimize our
likely to benefit from AI, followed by fundamental active construction and securities selection also featuring processes. It’s particularly valuable in minimizing
understand the underlying
strategies and market-weighted (passive) approaches. prominently. Sentiment analysis, enabled by AI’s tracking error and transaction costs, which directly economic rationale of any
natural language processing capabilities, is gaining impact the returns we can deliver to clients.”
For systematic/factor strategies, AI is seen as crucial, traction as well. A North American institutional
new factor discovered by
scoring 7.9 out of 10 in importance (figure 3.3). investor explained: “AI is enhancing our fundamental Interestingly, the incorporation of Environmental, AI before we use it in our
Managing factor exposures emerged as the most analysis, not replacing it. It is helping us process Social and Governance (ESG) considerations was
significant application, closely followed by analyzing information more quickly and identify patterns that mentioned across all strategy types, underscoring the
models.
factor interactions. Investors are also leveraging AI for might escape human analysis. This allows our team to potential for AI to facilitate more comprehensive ESG
identifying new factors, constructing portfolios, and focus on higher-level strategic decisions.” integration (a topic discussed further in Theme 4).
Wholesale Investor
forecasting factor returns. An institutional investor
Middle East
from North America commented: “AI is revolutionizing Even for market-weighted (passive) strategies AI is still
how we approach factor investing. It is helping us seen as important, scoring 6.7 out of 10. Automated
uncover new factors and understand non-linear rebalancing emerged as the key application in this
interactions that were previously hidden. This is area, followed closely by portfolio construction. AI
opening up new avenues for alpha generation.” is also being employed to minimize tracking error

Figure 3.3
Top - Importance of AI for different investment styles, score /10; Bottom - Most important uses of AI for different investment styles, % citations

7.9 7.4 6.7

Factor Fundamental active Market weighted (passive)

Managing factor exposures 74 Risk management 86 Automated rebalancing 76

Analyzing factor interactions 72

Constructing portfolios 69 Constructing portfolios 70

Identifying new factors 66

Choosing securities/stock picking 65 Minimizing tracking error 66
Constructing portfolios 63
Investor sentiment analysis 52 Minimizing transaction costs 41
Forecasting factor returns 61
Incorporation of ESG 35 Incorporation of ESG 40
Incorporation of ESG 34

Minimizing transaction costs 32 Trade execution 20 Tax-efficient trading 18

How important do you think AI will become for different investment styles? For market weighted/passive strategies in which areas do you think AI will be most important? For fundamental active strategies in which areas
do you think AI will be most important? For factor strategies in which areas do you think AI will be most important?
22
Natural language processing: a key AI application The promise of generative AI

Natural Language Processing (NLP) has emerged Language translation (34% current use, 61% Generative AI is seen as having significant An institutional investor from Europe shared:
as a key area of AI application within investment future use) is another important application of potential to generate alpha, with 59% of “We’re exploring AI’s potential for developing
processes. Sentiment analysis leads the pack, NLP. This capability is particularly valuable for respondents believing it can play a significant role new investment strategies, particularly in areas
with 44% of respondents currently using NLP for investors operating in global markets, allowing in identifying market inefficiencies and 55% seeing where traditional methods might miss complex
this purpose, and 72% anticipating its use in the them to quickly process and analyze information a significant role for generative AI in developing patterns.” Another added, “We’re looking into
future (figure 3.4). An institutional investor from in multiple languages. As one European investor creative investment strategies (figure 3.5). using AI for finding non-linear relationships in
APAC shared their experience: “We use sentiment noted, “NLP-powered translation has significantly areas like bond-equity correlations.”
analysis based on X (formerly Twitter) data in expanded our research capabilities in emerging A wholesale investor from Europe commented:
our systematic models. It helps us to digest big markets where English-language information “The next stage of development is AI integration However, investors are more cautious about
data and include not only quantitative but also is limited.” with existing portfolios. We are looking at AI to be using generative AI for trade execution, with only
qualitative elements in our analysis.” able to make suggestions such as shifting assets 28% seeing a significant role for it in this area.
Topic modeling (25% current use, 57% future use) between sectors to improve efficiency, enhance An institutional investor from North America
NLP is also being used to analyze earnings call is gaining traction as a way to identify emerging returns, or rebalance factors.” explained: “While we’re enthusiastic about using
transcripts, not just for content but also for tone trends and themes across large volumes of text generative AI for strategy development, we’re
and sentiment. An institutional investor from data. This technique can help investors spot new The potential applications of generative AI in more hesitant about applying it directly to trade
North America explained: “AI can parse text investment opportunities or potential risks before investment are wide-ranging. Some investors are execution. The stakes are simply too high to fully
information and detect nuances in earnings calls they become widely recognized. using it to generate and test thousands of potential automate this process without human oversight.”
even experienced humans might miss. It can trading strategies, far more than a human team
capture intonation, analyze word choice, and The growing importance of NLP is also reflected could develop manually. Others are exploring
identify subtle changes between calls.” in how firms are adapting their processes. Many its use in scenario analysis, using generative AI
respondents reported developing in-house NLP to create a wide range of possible future market
capabilities or partnering with specialized firms to scenarios to stress-test their portfolios.
leverage these technologies.

Figure 3.4 2023 Figure 3.5 No role for generative AI

Use of natural language processing in the investment process, % citations 2024 Applications for generative AI, % citations Moderate role for generative AI
Future role Significant role for generative AI

41
44 Identifying market inefficiencies
Sentiment analysis
72
3 38 59
31
34 Developing creative investment strategies
Language translation
61
7 38 55
20
25 Sentiment analysis on alternative data
Topic modeling
57 8 47 45
20
29 Generating investment research reports
News analysis
62 19 47 34

17
Automating trade execution
Risk analysis 27
67 19 53 28

What types of Natural Language Processing (NLP) techniques do you use in your investment process? How can generative AI models be leveraged to generate alpha? 23
Benefits and challenges of AI in investment processes

Investors see multiple benefits in incorporating An institutional investor from North America Figure 3.6
AI into their investment processes. Improved highlighted a specific concern: “Many boards 2023
Benefits of using AI in the investment process, % citations
risk management leads the pack, cited by 81% are concerned about AI potentially leaking 2024
of respondents (up from 75% last year), followed sensitive information about plans or trading
closely by more accurate and timely insights processes, leading to front-running risks.” 75
(75%, up from 73%) and increased efficiency and Another institutional investor from Europe added,
Improved risk management 81
automation (70%, up from 61%) (figure 3.6). “Once AI-derived strategies become common
knowledge, they may lose effectiveness.”
An institutional investor from North America 73
elaborated: “AI helps identify potential pitfalls that The ‘black box’ nature of some AI models poses More accurate and timely insights 75
we can hedge against or take advantage of. It can particular challenges in the heavily regulated
process vast amounts of data to spot risks that investment industry. As one Middle Eastern 61
humans might overlook.” institutional investor put it, “We need to be able to
Increased efficiency and automation 70
explain our investment decisions to stakeholders,
The efficiency gains from AI are also significant. which can be challenging with complex AI
An institutional investor from APAC noted: “We models.” Increased flexibility to adapt to 63
have been able to speed up our investment changing market conditions 59
decision making process. The benefit here is to Data quality is another crucial issue. As one
not replace our market research, but free up time APAC-based wholesale investor noted, “The 46
to learn what’s out there.” quality and completeness of data is crucial for AI Enhanced portfolio diversification
applications. We spend a significant amount of 57
However, the adoption of AI is not without time cleaning and preparing data before we can
challenges. Complexity and interpretability apply AI techniques.” 31
of AI models remain the top concern, cited Improved scalability and capacity 41
by 78% of respondents, up from 72% last year
(figure 3.7). This is followed by data quality and 37
completeness (67%, up from 48%) and the cost of More effective trading decisions 32
implementation (53%).

What do you see as the main benefits of using AI in the investment process?

We are concerned that

when you send data to a
large language centre you
have effectively given that
company the right to see
your data and models.

Institutional Investor
Middle East
24
Ethical considerations and regulatory challenges The Future Role of AI in Investment Processes

As AI becomes more prevalent in investment Regulatory challenges were cited by 33% of Looking ahead, investors anticipate AI playing Many respondents also anticipate AI playing
processes, ethical considerations and regulatory respondents, up from 24%, with a number an increasingly important role in investment a crucial role in personalizing investment
challenges are also coming to the fore. While only of respondents concerned the regulatory processes. 34% of respondents expect AI to strategies. A European wholesale investor
28% of respondents cited ethical considerations landscape is struggling to keep pace with rapid become more important than traditional analysis commented, “AI could allow us to create highly
as a current challenge in implementing AI technological advancements. Many respondents methods in the next 10 years, while 44% believe it customized portfolios that align precisely with
(figure 3.7), many anticipate this becoming expressed a need for clearer regulatory guidance will become equally important (figure 3.8). each client’s risk tolerance, goals, and values.
a more significant issue in the future. Key on the use of AI in investment processes. This level of personalization was simply not
ethical concerns include the potential for AI An institutional investor from North America feasible before AI.”
to perpetuate or amplify biases, the fairness A North American wholesale investor shared this: “Over the next decade, systematic
of AI-driven investment decisions, and the commented: “The regulatory framework is still investing will grow significantly. We’ve reached However, not all investors see AI replacing
implications of AI for market stability. evolving. We are seeing increased scrutiny from the limits of human analysis, but AI and machine traditional methods. Another institutional
regulators, particularly around issues of model learning can provide customization across investor from North America noted: “AI will be
risk management and algorithmic trading. Clear thousands of stocks.” complementary, just another consideration within
guidelines and standards for the use of AI in the mix, much like ETFs were 10-15 years ago.
investment processes will be crucial as adoption There will be new trends to discover and develop -
continues to grow.” it’s a new current in the investment world.”

Figure 3.7 2023 Figure 3.8 It will become more important than
Challenges of using AI in the investment process, % citations 2024 Importance of AI in investment process in 10 years’ time, traditional analysis methods
% citations It will become equally important as
traditional analysis methods
It will still be less important than
Complexity and interpretability of 72
traditional analysis methods
AI models 78

48 13
Data quality and completeness
67 29 31
34
38
Cost of implementation 53 46
53

41 19
Limited availability of skilled 62
AI professionals 42

34 44
Lack of understanding/ buy-in 58
from stakeholders 42
62
Regulatory barriers 24 54 52
33
25
27 22
Ethical considerations (e.g. making 11
ethical investment decisions) 28 0 0
2023 2024 Middle East APAC Europe North America

What are the main challenges of using AI in the investment process? How do you see the role of AI in the investment process evolving in the next 10 years? 25
T H E M E 4

An active approach
to ESG: The rise
of customized,
systematic strategies

The ESG landscape is undergoing Systematic approaches have The development of proprietary
a transformation as investors emerged as the vanguard of this ESG methodologies and adoption
increasingly demand highly evolution, offering the flexibility of advanced analytical tools reflect
customized solutions to meet their and scalability required to create investors’ drive for more bespoke
unique sustainability objectives highly tailored ESG strategies sustainability assessments
26
The landscape of Environmental, Social, and Governance (ESG)
investing is witnessing a shift as investors increasingly demand
A systematic approach
highly customized, bespoke solutions to meet their unique helps to improve the overall
sustainability objectives. Our study reveals ESG integration has performance and diversify
become nearly ubiquitous, with 87% of surveyed investors now the portfolio to obtain
similar returns to a
incorporating ESG considerations into their portfolios, up from non-ESG portfolio.
82% in the previous year (figure 4.1). This widespread adoption
underscores not just the growing importance of sustainability in
investment decision-making, but also the pressing need for more Institutional Investor
North America
tailored approaches.

In response to this demand, systematic Figure 4.1 Do not incorporate and not considering
approaches have emerged as a key tool with Incorporation of ESG, % citations Considering incorporating
investors identifying data-driven strategies offer Currently incorporate
the flexibility and scalability required to create
bespoke ESG solutions that align precisely 4 13 6 6 2
with their specific goals, risk tolerances, and (C) 7 14
18 12
ethical considerations. By leveraging advanced
analytics and quantitative techniques, systematic 38 8
approaches are enabling investors to move
beyond one-size-fits-all ESG products and
develop truly custom sustainability strategies.

100 98
87
82
78 78
62

2022 2023 2024 Middle East APAC Europe North America

Do you incorporate ESG in your overall portfolio? 27

A shift towards systematic ESG investing is Figure 4.2 Not using systematic approach
evident in our findings, with 67% of investors Use of systematic approach to incorporate ESG, % citations Moderately systematic approach
now employing a systematic approach (up Highly systematic approach
from 63% last year). Notably, 15% characterize
their integration of ESG as highly systematic,
indicating a growing recognition of the power of
quantitative methods to deliver customized ESG 33
37
outcomes (figure 4.2).

As one institutional investor from Europe noted,

“Off-the-shelf ESG solutions no longer suffice.
We need the ability to fine-tune our ESG approach
to reflect our specific priorities and the unique
ESG challenges in our investment universe.
52
Systematic strategies give us the tools to do that.” 50
A wholesale investor from Europe added:
“We have run ESG and sustainable propositions
and products for 20 years because of the
nature of our client base. Over time, we’ve had
to become increasingly sophisticated in our
approach to meet the diverse and evolving 13 15
needs of our clients.”
2023 2024
To what extent are you using a systematic approach to implement ESG?

Respondents noted a key advantage of a Figure 4.3 2023

systematic framework was the ability to integrate Advantages of systematic approach to ESG, % citations 2024
ESG factors more precisely, avoiding unintended
risks, biases or sector tilts that could negatively
impact performance. This is reflected in 80% of 71
Improved risk management
respondents citing improved risk management as 80
a key benefit of a systematic approach, and 78%
identifying improved performance (figure 4.3). 77
Interestingly, the benefit of controlling portfolio Improved performance
tilts and biases has seen the largest year-on-year 78
increase, rising to 46% as investors recognize
the role of systematic strategies in creating truly 59
bespoke portfolios that mitigate unintended Enhanced portfolio diversification
consequences of ESG implementation. 64

An institutional investor from North America 29

elaborated on this point: “Our systematic Identification and control of portfolio tilts/bias
46
approach allows us to identify companies that
are ESG leaders or improvers in their sectors,
which we believe will translate into financial 39
outperformance over time.” Increased efficiency/lower costs
40

Improved scalability and capacity 36

(e.g. for applying across different asset classes) 38

What are the advantages of a systematic approach to applying ESG? 28

The rise of customized
systematic tools in ESG
implementation

Among the tools being used for systematic Figure 4.4 2023
ESG integration, quantitative-based scoring Systematic tools used to implement ESG, % citations
systems and risk management tools have the 2024
highest rates of adoption, cited by 83% and 66%
of respondents respectively (figure 4.4). ESG Quantitative-based ESG scoring 63
portfolio optimization has seen a marked increase (e.g. as input into investment decisions) 83
in uptake, rising from 43% last year to 61% this year
Risk management (e.g. modeling impact of 65
as investors put more emphasis on balancing ESG
climate change on company performance) 66
goals with financial performance.
ESG portfolio optimization (e.g. using quantitative modeling 43
An institutional investor from North America to balance financial performance with ESG considerations) 61
emphasized the importance of these tools
Carbon footprint analysis 55
in creating customized solutions: “Portfolio
56
optimization is one of the most valuable use
cases for systematic tools within ESG. It allows Quantitative-based impact investing 38
us to balance our specific ESG priorities with our (e.g. systematic assessment of ESG impact) 40
financial objectives in a way that’s tailored to our
Scenario analysis 29
investment mandate.”
(e.g. for modeling impact of climate change or social unrest) 30
The use of systematic tools is also enabling more 17
Machine learning (e.g. to analyze/combine large data sets)
sophisticated, customized carbon management 24
strategies. Our study shows 56% of investors are Natural language processing 15
using carbon footprint analysis tools, while 30% (e.g. to identify ESG-related signals in earnings calls)
22
are employing scenario analysis. This reflects a
focus on climate-related risks and opportunities Quantitative-based active ownership 20
within ESG investing, with investors seeking to (e.g. systematic tools for voting/engagement) 20
tailor their approach to their specific carbon
reduction goals and climate risk tolerances.
What systematic tools/methodologies are you using to implement ESG?

29
The development of proprietary ESG metrics

In line with the drive for greater customization, half of The development of customized ESG metrics follows such as supply chain management, product life-
the institutional investors interviewed have created diverse paths, reflecting the varying resources and cycle assessments, and the outcomes of company Custom ESG metrics capture
in-house ESG ratings (figure 4.5). This move is often expertise of different investors. Among those who engagements in order to arrive at a more holistic ESG
driven by dissatisfaction with available solutions, with have developed proprietary metrics, 53% did so view tailored to their investment universe.
nuances specific to our
these proprietary approaches going beyond off-the- through external collaboration with ratings providers investment universe and
shelf ratings to align precisely with each investor’s or consultants. This approach allows investors to Wholesale investors, while less likely to develop fully
unique perspective on sustainability. leverage external expertise while still tailoring the proprietary methodologies, are also seeking ways to
stakeholder priorities.
methodology to their specific needs. Meanwhile, 36% customize their ESG approach. Many are integrating
An institutional investor from North America shared relied entirely on in-house research teams, indicating data from multiple sources into their fund selection
their thinking: “We found that off-the-shelf ESG a significant commitment to building internal ESG models, allowing for a more tailored ESG assessment.
ratings often didn’t capture the nuances of certain capabilities. A smaller proportion, 11%, collaborated A wholesale investor from Europe explained: “We’ve
Institutional Investor
industries or align with our investment philosophy. By with asset managers to develop their bespoke ESG developed a proprietary framework for combining
APAC
developing our own methodology, we can ensure our metrics (figure 4.6). and weighting ESG data from multiple providers. This
ESG assessments are fully aligned with our investment allows us to create a more robust ESG assessment that
process and reflect the specific ESG factors we One institutional investor highlighted their in-house aligns with our investment philosophy and the needs
believe are most material to financial performance.” metrics provide granular, industry-specific factors of our clients.”

Figure 4.5 Yes Figure 4.6

Have developed in-house ESG metrics, % citations No How developed in-house ESG metrics, % citations (those that have developed metrics)

23
External collaboration with
50 ratings provider/consultant 53

77 In-house research team 36

50

External collaboration 11
Institutional Wholesale
with asset manager
Have you developed your own in-house ESG metrics to rate companies/securities?

How were these developed and tested by your organization? 30

Capturing ESG momentum: a new frontier in customization Figure 4.8
Momentum metrics seen as valuable for ESG, % citations

As investors seek more sophisticated ways to tailor ESG momentum is increasingly seen as predictive
their ESG strategies, there’s growing interest in of future financial performance and an indicator
capturing ESG momentum. Around three-quarters of management quality, potentially offering alpha Trend signals in ESG scores 81
of investors are either already doing so or believe generation opportunities. This represents a shift
it is possible, seeing it as a way to create more from static ESG assessments to more dynamic,
dynamic and forward-looking ESG portfolios forward-looking approaches that can be tailored to
(figure 4.7). each investor’s view on the relationship between
ESG improvement and financial performance.
Trend signals in ESG scores and emissions data Momentum in reported emissions
63
lead investor interest, with 81% and 63% of
respondents citing these as valuable momentum
metrics respectively (figure 4.8). An institutional
investor from North America explained the
rationale: “Momentum data shows where the
ESG/sustainability references 49
market is going and allows you to get ahead of within company reports over time
the trends. It’s another layer of customization that
allows us to align our portfolio with improving
ESG practices.”

Positive momentum in 21
news and media

Which of the following momentum metrics are likely to be valuable?

Figure 4.7 Yes and doing so ourselves

Belief that systematic approach can capture Yes but not doing so ourselves
ESG momentum, % citations No

15
26

60
52

22 25

Institutional Wholesale

Do you think a systematic approach can be used to capture momentum in ESG metrics? 31
Systematic strategies in ESG portfolio construction and analysis

In building ESG portfolios, investors value a Other popular strategies include constraining
variety of systematic methods. Setting minimum exposure to companies with high carbon By excluding high-risk
portfolio-level ESG scores, restricting investments risk ratings (46% finding it very valuable) and
in undesired sectors and limiting exposure to low- controlling exposure to desired ESG themes
companies and setting
rated companies are seen as the most useful, with such as renewable energy (41%). These methods ESG thresholds, we aim to
55% describing each as very valuable (figure 4.9). reflect the growing importance of climate-related
factors in ESG investing and the desire for thematic
capture long-term value
alignment in sustainable portfolios. while adhering to our
sustainability principles.

Institutional Investor
Europe

Figure 4.9 Not Valuable

Value of different systematic strategies when building an ESG portfolio, % citations Moderately Valuable
Very Valuable

Setting minimum portfolio-level ESG scores 4 41 55

Restricting investments in companies involved in

6 39 55
undesired sectors

Limiting maximum exposure to companies with

7 38 55
low ESG ratings

Constraining the portfolio's exposure to companies

9 45 46
with high carbon risk ratings
14 40
Controlling exposure to desired ESG themes
7 52 41
(e.g. renewable energy)

Setting a maximum limit on the portfolio's 12 47 41

carbon emissions intensity

Targeting a minimum improvement in weighted

10 62 28
average carbon emissions year-over-year

Excluding companies that derive a certain

28 49 23
percentage of revenue from fossil fuels

How valuable do think the following approaches are when building an ESG portfolio? 32
Investors are employing equally sophisticated Figure 4.10 Not Valuable
systematic approaches for analyzing and Value of quantitative ESG analysis for measuring and attributing performance, % citations Moderately Valuable
attributing the impact of ESG integration. The most Very Valuable
valued method is assessing the impact of ESG
ratings on performance, with 76% of respondents
finding this very valuable (figure 4.10). This
ESG ratings impact 6 18 76
underscores the increased belief ESG factors can
materially influence financial outcomes, both
positively and negatively, highlighting the critical
role of systematic analysis in understanding, and
potentially mitigating, this impact. 5 43 52
ESG risk exposure analysis contribution

The diversity and sophistication of these

systematic strategies in both portfolio
construction and performance analysis reflect Relative performance benchmarking 9 41 50
the maturing nature of ESG investing. As the field
evolves, investors are increasingly able to tailor
their ESG approaches to specific objectives,
whether that’s risk mitigation, performance ESG momentum/trend analysis 14 46 40
enhancement, or alignment with particular
sustainability themes. This customization,
enabled by systematic methods, is seen as key
to the continued growth and effectiveness of Active ownership/engagement impact analysis 9 55 36
ESG integration.

As systematic ESG strategies continue to evolve,

they promise to offer new possibilities for creating
UN Sustainable Development Goals alignment analysis 24 41 35
highly customized, bespoke sustainability
solutions. The future of ESG investing looks likely
to be increasingly data-driven and integrated into
core investment processes, with each investor
able to precisely tailor their approach to their Controversial holdings analysis 25 59 16
specific needs and beliefs.

How valuable do think the following approaches are for analyzing and attributing performance for an ESG portfolio?

33
Sample and
methodology

The fieldwork for this study was conducted

by NMG Consulting. Invesco chose to engage
a specialist independent firm to ensure high-
quality objective results. Key components of the
methodology include:

A focus on the key decision makers In-depth (typically one hour) Results interpreted by NMG’s
conducting interviews using face-to-face interviews using a strategy team with relevant
experienced consultants and structured questionnaire to ensure consulting experience in the
offering market insights quantitative as well as qualitative global asset management sector
analytics were collected
34
In this study, all respondents were ‘systematic Figure 5.1 Figure 5.2
investors’, defined as investors that employ Assets under management by segment ($ trillion, as of 31 March 2024) Sample by segment
structured, rules-based quantitative models and
algorithms to make investment decisions and 12.4 69
build portfolios. We deliberately targeted a mix of
investor profiles across multiple markets, with a 62
preference for those that were larger and/or more
experienced. 9.9

In 2024 we conducted interviews with 131

different pension funds, insurers, sovereign
investors, asset consultants, wealth managers
and private banks globally. Together these
investors are responsible for managing $22.3
trillion in assets (as of 31 March 2024). This core
study was supplemented with 20 additional
in-depth interviews with highly experienced
systematic investors. The breakdown of the
core interview sample by investor segment and
geographic region is displayed in figures 5.1, 5.2
and 5.3.

Institutional investors are defined as pension

funds (both defined benefit and defined
contribution), sovereign wealth funds, insurers, Institutional Wholesale Institutional Wholesale
endowments and foundations.

Wholesale investors are defined as discretionary

managers or model portfolio constructors
for pools of aggregated retail investor assets,
including discretionary investment teams and Figure 5.3
fund selectors at private banks and financial Sample by region
advice providers, as well as discretionary fund
managers serving those intermediaries. 49

Invesco is not affiliated with NMG Consulting. 43

26

13

Middle East APAC Europe North America

35
Risk warnings

The value of investments and any income will fluctuate (this Commodities may subject an investor to greater volatility to replicate the performance of a specified index. Both
may partly be the result of exchange rate fluctuations) and than traditional securities such as stocks and bonds and can index-based and actively managed ETFs are subject to risks
investors may not get back the full amount invested. fluctuate significantly based on weather, political, tax, and similar to stocks, including those related to short selling and
other regulatory and market developments. margin maintenance.
Factor investing (as known as smart beta or active quant)
is an investment strategy in which securities are chosen Investments in real estate related instruments may be The use of environmental, social and governance factors to
based on certain characteristics and attributes that may affected by economic, legal, or environmental factors that exclude certain investments for nonfinancial reasons may
explain differences in returns. Factor investing represents affect property values, rents or occupancies of real estate. limit market opportunities available to funds not using
an alternative and selection index-based methodology that Real estate companies, including REITs or similar structures, these criteria. Further, information used to evaluate
seeks to outperform a benchmark or reduce portfolio risk, tend to be small and mid-cap companies and their shares environmental, social and governance factors may not
both in active or passive vehicles. There can be no assurance may be more volatile and less liquid. be readily available, complete or accurate, which could
that performance will be enhanced or risk will be reduced for negatively impact the ability to apply environmental, social
strategies that seek to provide exposure to certain factors. Alternative investment products, including hedge funds and governance standards.
Exposure to such investment factors may detract from and private equity, involve a high degree of risk, often
performance in some market environments, perhaps for engage in leveraging and other speculative investment
extended periods. Factor investing may underperform cap- practices that may increase the risk of investment loss,
weighted benchmarks and increase portfolio risk. There is no can be highly illiquid, are not required to provide periodic
assurance that the investment strategies discussed in this pricing or valuation information to investors, may involve
material will achieve their investment objectives. complex tax structures and delays in distributing important
tax information, are not subject to the same regulatory
A value style of investing is subject to the risk that the requirements as mutual funds, often charge high fees
valuations never improve or that the returns will trail other which may offset any trading profits, and in many cases
styles of investing or the overall stock markets. the underlying investments are not transparent and are
known only to the investment manager. There is often no
Companies that issue quality stocks may experience lower secondary market for hedge funds and private equity, and
than expected returns or may experience negative growth, none is expected to develop. There may be restrictions on
as well as increased leverage, resulting in lower than transferring interests in such investments.
expected or negative returns to Fund shareholders.
Investment in infrastructure-related companies may be
Momentum style of investing is subject to the risk that the subject to high interest costs in connection with capital
securities may be more volatile than the market as a whole construction programs, costs associated with environmental
or returns on securities that have previously exhibited price and other regulations, the effects of economic slowdown
momentum are less than returns on other styles of investing. and surplus capacity, the effects of energy conservation
policies, governmental regulation and other factors.
Of course, low volatility cannot be guaranteed.
Cryptocurrency is considered a highly speculative
Stocks of small-capitalization companies tend to be more investment due to its lack of guaranteed value and limited
vulnerable to adverse developments, may be more volatile, track record. Because of its digital nature, cryptocurrency
and may be illiquid or restricted as to resale than large poses risk from hackers, malware, fraud, and operational
companies. glitches. Cryptocurrency is not legal tender and are operated
by a decentralized authority, unlike government-issued
Interest rate risk refers to the risk that bond prices generally currencies. Cryptocurrency exchanges and accounts are
fall as interest rates rise and vice versa. An issuer may be not backed or insured by any type of federal or government
unable to meet interest and/or principal payments, thereby program or bank. Currently, there is relatively limited use of
causing its instruments to decrease in value and lowering cryptocurrency in the retail and commercial marketplace,
the issuer’s credit rating. which contributes to price volatility.

In general, stock values fluctuate, sometimes widely, in There are risks involved with investing in ETFs, including
response to activities specific to the company as well as possible loss of money. Index-based ETFs are not actively
general market, economic and political conditions. managed. Actively managed ETFs do not necessarily seek

36
Important information

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37
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